Thirty One Million Unemployed or Underemployed, Subpar Economic Growth at 1.7 to 1.9 Percent, Collapse of United States Dynamism of Income Growth and Employment Creation, Stagnation of Per Capita Real Disposable Personal Income with Temporary Surge in Realization of Income Anticipating Tax Increases in 2013, Peaking Valuations of Risk Financial Assets and Uncertain World Economic Growth and International Finance
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012, 2013
Executive Summary
IA Thirty One Million Unemployed or Underemployed
IA1 Summary of the Employment Situation
IA2 Number of People in Job Stress
IA3 Long-term and Cyclical Comparison of Employment
IA4 Job Creation
IA5 Stagnating Real Wages
IB Collapse of United States Dynamism of Income Growth and Employment Creation
II Mediocre and Decelerating United States Economic Growth
IA Mediocre and Decelerating United States Economic Growth
IA1 Contracting Real Private Fixed Investment
IIB Stagnating Real Disposable Income and Consumption Expenditures
IIB1 Stagnating Real Disposable Income and Consumption Expenditures
IIB2 Financial Repression
III World Financial Turbulence
IIIA Financial Risks
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
IV Global Inflation
V World Economic Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk Financial Assets
VII Economic Indicators
VIII Interest Rates
IX Conclusion
References
Appendixes
Appendix I The Great Inflation
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
IIIG Appendix on Deficit Financing of Growth and the Debt Crisis
IIIGA Monetary Policy with Deficit Financing of Economic Growth
IIIGB Adjustment during the Debt Crisis of the 1980s
II Mediocre and Decelerating United States Economic Growth. The US is experiencing the first expansion from a recession after World War II without growth, jobs (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html) and hiring (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html), unsustainable government deficit/debt (http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html) and waves of inflation (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html) while valuations of risk financial assets approach historical highs. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The expansion since the third quarter of 2009 (IIIQ2009 (Jun)) to the latest available measurement for IVQ(2012) has been at the average annual rate of 2.1 percent per quarter in contrast with 6.2 percent on average in all expansions after World War II. As a result, there are 31.4 million unemployed or underemployed in the United States for an effective unemployment rate of 19.4 percent (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html).
The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.4 percent on an annual basis in 2010 and 1.8 percent in 2011 to 2.2 percent in 2012. Calculations show that actual growth is around 1.7 to 1.9 percent per year. This rate is well below 3 percent per year in trend from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Growth is not only mediocre but sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 31.4 million people corresponding to 19.4 percent of the effective labor force of the United States (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html). In the four quarters of 2011 and the four quarters of 2012, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.1 percent in the first quarter of 2011 (IQ2011), 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011, 4.1 percent in IVQ2011, 2.0 percent in IQ2012, 1.3 percent in IIQ2012, revised 3.1 percent in IIIQ2012 and -0.1 percent in IVQ2012. GDP growth in IIIQ2012 was revised from 2.7 percent seasonally adjusted annual rate (SAAR) to 3.1 percent but mostly because of contribution of 0.73 percentage points of inventory accumulation and one-time contribution of 0.64 percentage points of expenditures in national defense that without them would have reduced growth from 3.1 percent to 1.73 percent. Equally, GDP growth in IVQ2012 is measured in the advanced estimate as minus 0.1 percent but mostly because of deduction of divestment of inventories of 1.27 percentage points and deduction of one-time national defense expenditures of 1.28 percentage points. The annual equivalent rate of growth of GDP for the four quarters of 2011 and the four quarters of 2012 is 2.0 percent, obtained as follows. Discounting 0.1 percent to one quarter is 0.025 percent {[(1.001)1/4 -1]100 = 0.025}; discounting 2.5 percent to one quarter is 0.62 percent {[(1.025)1/4 – 1]100}; discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)1/4 – 1]100}; discounting 4.1 percent to one quarter is 1.0 {[(1.04)1/4 -1]100; discounting 2.0 percent to one quarter is 0.50 percent {[(1.020)1/4 -1]100); discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)1/4 -1]100}; discounting 3.1 percent to one quarter is 0.77 {[(1.031)1/4 -1]100); and discounting -0.1 percent to one quarter is -0.025 percent {[(0.999)1/4 – 1]100}. Real GDP growth in the four quarters of 2011 and the four quarters of 2012 accumulated to 3.6 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0077 x 0.9997) - 1]100 = 3.6%}. This is equivalent to growth from IQ2011 to IVQ2012 obtained by dividing the seasonally-adjusted annual rate (SAAR) of IVQ2012 of $13,647.6 billion by the SAAR of IVQ2010 of $13,181.2 (http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1 and Table II-6 below) and expressing as percentage {[($13,647.6/$13,181.2) - 1]100 = 3.5%} with a minor rounding discrepancy. The growth rate in annual equivalent for the four quarters of 2011 and the four quarters of 2012 is 1.8 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0077 x 0.9997)4/8 -1]100 = 1.8%], or {[($13,647.6/$13,181.2)]4/8-1]100 = 1.8%} dividing the SAAR of IVQ2012 by the SAAR of IVQ2010 in Table II-6 below, obtaining the average for eight quarters and the annual average for one year of four quarters. Growth in the four quarters of 2012 accumulates to 1.57 percent {[(1.02)1/4(1.013)1/4(1.031)1/4(0.999)1/4 -1]100 = 1.57%}. This is equivalent to dividing the SAAR of $13,647.6 billion for IVQ2012 in Table II-6 by the SAAR of $13,441.0 billion in IVQ2011 except for a rounding discrepancy to obtain 1.54 percent {[($13,647.6/$13,441.0) – 1]100 = 1.54%}. The US economy is still close to a standstill especially considering the GDP report in detail. Excluding growth at the SAAR of 2.5 percent in IIQ2011 and 4.1 percent in IVQ2011 while converting growth in IIIQ2012 to 1.3 percent by deducting from 3.1 percent one-time inventory accumulation of 0.73 percentage points and national defense expenditures of 0.64 percentage points and converting growth in IVQ2012 by adding 1.27 percentage points of inventory divestment and 1.28 percentage points of national defense expenditure reductions to obtain 2.54 percent, the US economy grew at 1.7 percent in the remaining six quarters {[(1.00025x1.0032x1.005x1.0032x1.0077x0.0063)4/6 – 1]100 = 1.7%} with declining growth trend in three consecutive quarters from 4.1 percent in IVQ2011, to 2.0 percent in IQ2012, 1.3 percent in IIQ2012, 3.1 percent in IIIQ2012 that is more like 1.73 percent without inventory accumulation and national defense expenditures and -0.1 percent in IVQ2012 that is more likely 2.54 percent by adding 1.27 percentage points of inventory divestment and 1.28 percentage points of national defense expenditures. Weakness of growth is more clearly shown by adjusting the exceptional one-time contributions to growth from items that are not aggregate demand: 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011; 0.64 percentage points contributed by expenditures in national defense together with 0.73 points of inventory accumulation to growth of 3.1 percent in IIIQ2012; and deduction of 1.27 percentage points of inventory divestment and 1.28 percentage points of national defense expenditure reductions. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Wed Jan 30, 2012, the first or advanced estimate of GDP for IVQ2012 at minus 0.1 percent seasonally-adjusted annual rate (SAAR) (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_adv.pdf). In the four quarters of 2012, the US economy is growing at the annual equivalent rate of 1.9 percent {([(1.021/4(1.013)1/4(1.0173)1/4(1.0254)1/4]-1)100 = 1.89%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding 1.28 percentage points of national defense expenditure reductions and 1.27 percentage points of inventory divestment to growth of minus 0.1 percent SAAR in IVQ2012 to obtain 2.54 percent.
The objective of this section is analyzing US economic growth in the current cyclical expansion. There is initial discussion of the conventional explanation of the current recovery as being weak because of the depth of the contraction and the financial crisis and also brief discussion of the concept of “slow-growth recession.” More complete analysis is in IB Collapse of United States Dynamism of Income Growth and Employment Creation, which is updated with release of more information on the United States economic cycle. The bulk of the section consists of comparison of the current growth experience of the US with earlier expansions after past deep contractions and consideration of recent performance.
This blog has analyzed systematically the weakness of the United States recovery in the current business cycle from IIIQ2009 to the present in comparison with the recovery from the two recessions in the 1980s from IQ1983 to IVQ1985. The United States has grown on average at 2.1 percent annual equivalent in the 14 quarters of expansion since IIIQ2009 while growth was 6.2 percent on average in recoveries after World War II and 5.7 percent from IQ1983 to IVQ1985. The conventional explanation is that the recession from IVQ2007 (Dec) to IIQ2009 (Jun) was so profound that it caused subsequent weak recovery and that historically growth after recessions with financial crises has been weaker. Michael D. Bordo (2012Sep27) and Bordo and Haubrich (2012DR) provide evidence contradicting the conventional explanation: recovery is much stronger on average after profound contractions and also much stronger after recessions with financial crises than after recessions without financial crises. Insistence on the conventional explanation prevents finding policies that can accelerate growth, employment and prosperity.
A monumental effort of data gathering, calculation and analysis by Carmen M. Reinhart and Kenneth Rogoff is highly relevant to banking crises, financial crash, debt crises and economic growth (Reinhart 2010CB; Reinhart and Rogoff 2011AF, 2011Jul14, 2011EJ, 2011CEPR, 2010FCDC, 2010GTD, 2009TD, 2009AFC, 2008TDPV; see also Reinhart and Reinhart 2011Feb, 2010AF and Reinhart and Sbrancia 2011). See http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html The dataset of Reinhart and Rogoff (2010GTD, 1) is quite unique in breadth of countries and over time periods:
“Our results incorporate data on 44 countries spanning about 200 years. Taken together, the data incorporate over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate and monetary arrangements and historic circumstances. We also employ more recent data on external debt, including debt owed by government and by private entities.”
Reinhart and Rogoff (2010GTD, 2011CEPR) classify the dataset of 2317 observations into 20 advanced economies and 24 emerging market economies. In each of the advanced and emerging categories, the data for countries is divided into buckets according to the ratio of gross central government debt to GDP: below 30, 30 to 60, 60 to 90 and higher than 90 (Reinhart and Rogoff 2010GTD, Table 1, 4). Median and average yearly percentage growth rates of GDP are calculated for each of the buckets for advanced economies. There does not appear to be any relation for debt/GDP ratios below 90. The highest growth rates are for debt/GDP ratios below 30: 3.7 percent for the average and 3.9 for the median. Growth is significantly lower for debt/GDP ratios above 90: 1.7 for the average and 1.9 percent for the median. GDP growth rates for the intermediate buckets are in a range around 3 percent: the highest 3.4 percent average is for the bucket 60 to 90 and 3.1 percent median for 30 to 60. There is even sharper contrast for the United States: 4.0 percent growth for debt/GDP ratio below 30; 3.4 percent growth for debt/GDP ratio of 30 to 60; 3.3 percent growth for debt/GDP ratio of 60 to 90; and minus 1.8 percent, contraction, of GDP for debt/GDP ratio above 90.
For the five countries with systemic financial crises—Iceland, Ireland, UK, Spain and the US—real average debt levels have increased by 75 percent between 2007 and 2009 (Reinhart and Rogoff 2010GTD, Figure 1). The cumulative increase in public debt in the three years after systemic banking crisis in a group of episodes after World War II is 86 percent (Reinhart and Rogoff 2011CEPR, Figure 2, 10).
An important concept is “this time is different syndrome,” which “is rooted in the firmly-held belief that financial crises are something that happens to other people in other countries at other times; crises do not happen here and now to us” (Reinhart and Rogoff 2010FCDC, 9). There is both an arrogance and ignorance in “this time is different” syndrome, as explained by Reinhart and Rogoff (2010FCDC, 34):
“The ignorance, of course, stems from the belief that financial crises happen to other people at other time in other places. Outside a small number of experts, few people fully appreciate the universality of financial crises. The arrogance is of those who believe they have figured out how to do things better and smarter so that the boom can long continue without a crisis.”
There is sober warning by Reinhart and Rogoff (2011CEPR, 42) on the basis of the momentous effort of their scholarly data gathering, calculation and analysis:
“Despite considerable deleveraging by the private financial sector, total debt remains near its historic high in 2008. Total public sector debt during the first quarter of 2010 is 117 percent of GDP. It has only been higher during a one-year sting at 119 percent in 1945. Perhaps soaring US debt levels will not prove to be a drag on growth in the decades to come. However, if history is any guide, that is a risky proposition and over-reliance on US exceptionalism may only be one more example of the “This Time is Different” syndrome.”
As both sides of the Atlantic economy maneuver around defaults the experience on debt and growth deserves significant emphasis in research and policy. The world economy is slowing with high levels of unemployment in advanced economies. Countries do not grow themselves out of unsustainable debts but rather through de facto defaults by means of financial repression and in some cases through inflation. This time is not different.
Professor Michael D. Bordo (2012Sep27), at Rutgers University, is providing clear thought on the correct comparison of the current business cycles in the United States with those in United States history. There are two issues raised by Professor Bordo: (1) incomplete conclusions by lumping together countries with different institutions, economic policies and financial systems; and (2) the erroneous contention that growth is mediocre after financial crises and deep recessions, which is repeated daily in the media, but that Bordo and Haubrich (2012DR) persuasively demonstrate to be inconsistent with United States experience.
Depriving economic history of institutions is perilous as is illustrated by the economic history of Brazil. Douglass C. North (1994) emphasized the key role of institutions in explaining economic history. Rondo E. Cameron (1961, 1967, 1972) applied institutional analysis to banking history. Friedman and Schwartz (1963) analyzed the relation of money, income and prices in the business cycle and related the monetary policy of an important institution, the Federal Reserve System, to the Great Depression. Bordo, Choudhri and Schwartz (1995) analyze the counterfactual of what would have been economic performance if the Fed had used during the Great Depression the Friedman (1960) monetary policy rule of constant growth of money(for analysis of the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217). Alan Meltzer (2004, 2010a,b) analyzed the Federal Reserve System over its history. The reader would be intrigued by Figure 5 in Reinhart and Rogoff (2010FCDC, 15) in which Brazil is classified in external default for seven years between 1828 and 1834 but not again until 64 years later in 1989, above the 50 years of incidence for serial default. This void has been filled in scholarly research on nineteenth-century Brazil by William R. Summerhill, Jr. (2007SC, 2007IR). There are important conclusions by Summerhill on the exceptional sample of institutional change or actually lack of change, public finance and financial repression in Brazil between 1822 an 1899, combining tools of economics, political science and history. During seven continuous decades, Brazil did not miss a single interest payment with government borrowing without repudiation of debt or default. What is really surprising is that Brazil borrowed by means of long-term bonds and even more surprising interest rates fell over time. The external debt of Brazil in 1870 was ₤41,275,961 and the domestic debt in the internal market was ₤25,708,711, or 62.3 percent of the total (Summerhill 2007IR, 73).
The experience of Brazil differed from that of Latin America (Summerhill 2007IR). During the six decades when Brazil borrowed without difficulty, Latin American countries becoming independent after 1820 engaged in total defaults, suffering hardship in borrowing abroad. The countries that borrowed again fell again in default during the nineteenth century. Venezuela defaulted in four occasions. Mexico defaulted in 1827, rescheduling its debt eight different times and servicing the debt sporadically. About 44 percent of Latin America’s sovereign debt was in default in 1855 and approximately 86 percent of total government loans defaulted in London originated in Spanish American borrowing countries.
External economies of commitment to secure private rights in sovereign credit would encourage development of private financial institutions, as postulated in classic work by North and Weingast (1989), Summerhill 2007IR, 22). This is how banking institutions critical to the Industrial Revolution were developed in England (Cameron 1967). The obstacle in Brazil found by Summerhill (2007IR) is that sovereign debt credibility was combined with financial repression. There was a break in Brazil of the chain of effects from protecting public borrowing, as in North and Weingast (1989), to development of private financial institutions. According to Pelaez 1976, 283) following Cameron (1971, 1967):
“The banking law of 1860 placed severe restrictions on two basic modern economic institutions—the corporation and the commercial bank. The growth of the volume of bank credit was one of the most significant factors of financial intermediation and economic growth in the major trading countries of the gold standard group. But Brazil placed strong restrictions on the development of banking and intermediation functions, preventing the channeling of coffee savings into domestic industry at an earlier date.”
Brazil actually abandoned the gold standard during multiple financial crises in the nineteenth century, as it should have to protect domestic economic activity. Pelaez (1975, 447) finds similar experience in the first half of nineteenth-century Brazil:
“Brazil’s experience is particularly interesting in that in the period 1808-1851 there were three types of monetary systems. Between 1808 and 1829, there was only one government-related Bank of Brazil, enjoying a perfect monopoly of banking services. No new banks were established in the 1830s after the liquidation of the Bank of Brazil in 1829. During the coffee boom in the late 1830s and 1840s, a system of banks of issue, patterned after similar institutions in the industrial countries, supplied the financial services required in the first stage of modernization of the export economy.”
Financial crises in the advanced economies were transmitted to nineteenth-century Brazil by the arrival of a ship (Pelaez and Suzigan 1981). The explanation of those crises and the economy of Brazil requires knowledge and roles of institutions, economic policies and the financial system chosen by Brazil, in agreement with Bordo (2012Sep27).
The departing theoretical framework of Bordo and Haubrich (2012DR) is the plucking model of Friedman (1964, 1988). Friedman (1988, 1) recalls “I was led to the model in the course of investigating the direction of influence between money and income. Did the common cyclical fluctuation in money and income reflect primarily the influence of money on income or of income on money?” Friedman (1964, 1988) finds useful for this purpose to analyze the relation between expansions and contractions. Analyzing the business cycle in the United States between 1870 and 1961, Friedman (1964, 15) found that “a large contraction in output tends to be followed on the average by a large business expansion; a mild contraction, by a mild expansion.” The depth of the contraction opens up more room in the movement toward full employment (Friedman 1964, 17):
“Output is viewed as bumping along the ceiling of maximum feasible output except that every now and then it is plucked down by a cyclical contraction. Given institutional rigidities and prices, the contraction takes in considerable measure the form of a decline in output. Since there is no physical limit to the decline short of zero output, the size of the decline in output can vary widely. When subsequent recovery sets in, it tends to return output to the ceiling; it cannot go beyond, so there is an upper limit to output and the amplitude of the expansion tends to be correlated with the amplitude of the contraction.”
Kim and Nelson (1999) test the asymmetric plucking model of Friedman (1964, 1988) relative to a symmetric model using reference cycles of the NBER, finding evidence supporting the Friedman model. Bordo and Haubrich (2012DR) analyze 27 cycles beginning in 1872, using various measures of financial crises while considering different regulatory and monetary regimes. The revealing conclusion of Bordo and Haubrich (2012DR, 2) is that:
“Our analysis of the data shows that steep expansions tend to follow deep contractions, though this depends heavily on when the recovery is measured. In contrast to much conventional wisdom, the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis. In fact, on average, it is cycles without a financial crisis that show the weakest relation between contraction depth and recovery strength. For many configurations, the evidence for a robust bounce-back is stronger for cycles with financial crises than those without.”
The average rate of growth of real GDP in expansions after recessions with financial crises was 8 percent but only 6.9 percent on average for recessions without financial crises (Bordo 2012Sep27). Real GDP declined 12 percent in the Panic of 1907 and increased 13 percent in the recovery, consistent with the plucking model of Friedman (Bordo 2012Sep27). The comparison of recovery from IQ1983 to IVQ1985 is appropriate even when considering financial crises. There was significant financial turmoil during the 1980s. Bordo and Haubrich (2012DR, 11) identify a financial crisis in the United States starting in 1981. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5482.1 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.74 percent of GDP in a year. US GDP in 2011 is estimated at $15,075.7 billion, such that the bailout would be equivalent to cost to taxpayers of about $412.5 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery. Money center banks were under extraordinary pressure from the default of sovereign debt by various emerging nations that represented a large share of their net worth (see Pelaez 1986).
Bordo (2012Sep27) finds two probable explanations for the weak recovery during the current economic cycle: (1) collapse of United States housing; and (2) uncertainty originating in fiscal policy, regulation and structural changes. There are serious doubts if monetary policy is adequate to recover the economy under these conditions.
The concept of growth recession was popular during the stagflation from the late 1960s to the early 1980s. The economy of the US underperformed with several recession episodes in “stop and go” fashion of policy and economic activity while the rate of inflation rose to the highest in a peacetime period (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html Appendix I; see Taylor 1993, 1997, 1999, 1998LB, 2012Mar27, 2012Mar28, 2012FP, 2012JMCB). A growth recession could be defined as a period in which economic growth is insufficient to move the economy toward full employment of humans, equipment and other productive resources. The US is experiencing a dramatic slow growth recession with 31.425 million people in job stress, consisting of an effective number of unemployed of 20.354 million, 8.628 million employed part-time because they cannot find full employment and 2.433 million marginally attached to the labor force (see Table I-4 and earlier
http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html). The discussion of the growth recession issue in the 1970s by two recognized economists of the twentieth century, James Tobin and Paul A. Samuelson, is worth recalling.
In analysis of the design of monetary policy in 1974, Tobin (1974, 219) finds that the forecast of the President’s Council of Economic Advisers (CEA) was also the target such that monetary policy would have to be designed and implemented to attain that target. The concern was with maintaining full employment as provided in the Employment Law of 1946 (http://www.law.cornell.edu/uscode/15/1021.html http://uscode.house.gov/download/pls/15C21.txt http://www.eric.ed.gov/PDFS/ED164974.pdf) see http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html), which also created the CEA. Tobin (1974, 219) describes the forecast/target of the CEA for 1974:
“The expected and approved path appears to be quarter-to-quarter rates of growth of real gross national product in 1974 of roughly -0.5, 0.1, and 1 percent, with unemployment rising to about 5.6 percent in the second quarter and remaining there the rest of the year. The rate of price inflation would fall shortly in the second quarter, but rise slightly toward the end of the year.”
Referring to monetary policy design, Tobin (1974, 221) states: “if interest rates remain stable or rise during the current (growth) recession and recovery, this will be a unique episode in business cycle annals.” Subpar economic growth is often called a “growth recession.” The critically important concept is that economic growth is not sufficient to move the economy toward full employment, creating the social and economic adverse outcome of idle capacity and unemployed and underemployed workers, much the same as currently.
The unexpected incidence of inflation surprises during growth recessions is considered by Samuelson (1974, 76):
“Indeed, if there were in Las Vegas or New York a continuous casino on the money GNP of 1974’s fourth quarter, it would be absurd to think that the best economic forecasters could improve upon the guess posted there. Whatever knowledge and analytical skill they possess would already have been fed into the bidding. It is a manifest contradiction to think that most economists can be expected to do better than their own best performance. I am saying that the best forecasters have been poor in predicting the general price level’s movements and level even a year ahead. By Valentine’s Day 1973 the best forecasters were beginning to talk of the growth recession that we now know did set in at the end of the first quarter. Aside from their end-of-1972 forecasts, the fashionable crowd has little to blame itself for when it comes to their 1973 real GNP projections. But, of course, they did not foresee the upward surge of food and decontrolled industrial prices. This has been a recurring pattern: surprise during the event at the virulence of inflation, wisdom after the event in demonstrating that it did, after all, fit with past patterns of experience.”
Economists are known for their forecasts being second only to those of astrologers. Accurate forecasts are typically realized for the wrong reasons. In contrast with meteorologists, economists do not even agree on what happened. There is not even agreement on what caused the global recession and why the economy has reached a perilous standstill.
Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s. The growth rates and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table II-1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.3, 12.0, 6.8 and 5.4. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.7, 9.7, 8.3 and 10.5. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IIQ1976: 6.9, 5.3, 9.4 and 3.0. The disaster of the Great Inflation and Unemployment of the 1970, which made stagflation notorious, is even better in growth rates during the expansion phase in comparison with the current slow-growth recession.
Table II-1, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| IQ | IIQ | IIIQ | IVQ | |
| 1953 | 7.7 | 3.1 | -2.4 | -6.2 |
| 1954 | -1.9 | 0.5 | 4.6 | 8.3 |
| 1955 | 12.0 | 6.8 | 5.4 | 2.3 |
| 1957 | 2.5 | -1.0 | 3.9 | -4.1 |
| 1958 | -10.4 | 2.5 | 9.7 | 9.7 |
| 1959 | 8.3 | 10.5 | -0.5 | 1.4 |
| 1973 | 10.6 | 4.7 | -2.1/ | 3.9 |
| 1974 | 3.5 | 1.0 | -3.9 | 6.9 |
| 1975 | -4.8 | 3.1 | 6.9 | 5.3 |
| 1976 | 9.4 | 3.0 | 2.0 | 2.9 |
| 1979 | 0.7 | 0.4 | 2.9 | 1.1 |
| 1980 | 1.3 | -7.9 | -0.7 | 7.6 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.8 percent is more comparable to the latest revised 4.7 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Table II-2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981 to 1982 and 2007 to 2009, using the latest major revision published on Jul 29, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf) and the revision back to 2009 (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_adv.pdf) and the first estimate for IVQ2012 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_adv.pdf), which are available in the dataset of the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.4 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.3 percent to -8.9 percent. The striking difference is that in the first twelve quarters of expansion from IQ1983 to IIIQ1985, shown in Table II-2 in relief, GDP grew at the high quarterly percentage growth rates of 5.1, 9.3, 8.1, 8.5, 8.0, 7.1, 3.9, 3.3, 3.8, 3.4, 6.4 and 3.1 while the percentage growth rates in the first fourteen quarters of expansion from IIIQ2009 to IVQ2012, shown in relief in Table II-2, were mediocre: 1.4, 4.0, 2.3, 2.2, 2.6, 2.4, 0.1, 2.5, 1.3, 4.1, 2.0, 1.3, 3.1 and -0.1. Asterisks denote the estimates that have been revised by the BEA in the first round of Jul 29, 2011 and double asterisks the revisions released on Jul 27, 2012. During the four quarters of 2011 GDP grew at annual equivalent rates of 0.1 percent in IQ2011, 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011 and 4.1 percent in IVQ2011. The rate of growth of the US economy decelerated from seasonally-adjusted annual equivalent of 4.1 percent in IVQ2011 to 2.0 percent in IQ2012, 1.3 percent in IIQ2012, 3.1 percent in IIIQ2012, which is more like 1.7 percent without contributions of 0.73 percentage points by inventory change and 0.64 percentage points by one-time expenditures in national defense and -0.1 percent in IVQ2012, which is more like 2.54 percent without deductions of 1.27 percentage points of inventory divestment and 1.28 percent of reductions of one-time national defense expenditures. Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983. Inventory accumulation contributed 2.53 percentage points to the rate of growth of 4.1 percent in IVQ2011, which is the only relatively high rate from IQ2011 to IIIQ2012, and 0.73 percentage points to the rate of 3.1 percent in IIIQ2012. Economic growth and employment creation decelerated rapidly during 2012.
Table II-2, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| Q | 1981 | 1982 | 1983 | 1984 | 2008 | 2009 | 2010 |
| I | 8.6 | -6.4 | 5.1 | 8.0 | -1.8* | -5.3** | 2.3** |
| II | -3.2 | 2.2 | 9.3 | 7.1 | 1.3* | -0.3** | 2.2** |
| III | 4.9 | -1.5 | 8.1 | 3.9 | -3.7* | 1.4** | 2.6** |
| IV | -4.9 | 0.3 | 8.5 | 3.3 | -8.9* | 4.0** | 2.4** |
| 1985 | 2011 | ||||||
| I | 3.8 | 0.1** | |||||
| II | 3.4 | 2.5** | |||||
| III | 6.4 | 1.3** | |||||
| IV | 3.1 | 4.1** | |||||
| 1986 | 2012 | ||||||
| I | 3.9 | 2.0** | |||||
| II | 1.6 | 1.3 | |||||
| III | 3.9 | 3.1 | |||||
| IV | 1.9 | -0.1 |
*Revision of Jul 29, 2011 **Revision of Jul 27, 2012
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart II-1 of the Bureau of Economic Analysis (BEA) provides strong growth of real quarterly GDP in the US between 1947 and 1999. There is an evident acceleration of the rate of GDP growth in the 1990s as shown by a much sharper slope of the growth curve. Cobet and Wilson (2002) define labor productivity as the value of manufacturing output produced per unit of labor input used (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). Between 1950 and 2000, labor productivity in the US grew less rapidly than in Germany and Japan. The major part of the increase in productivity in Germany and Japan occurred between 1950 and 1973 while the rate of productivity growth in the US was relatively subdued in several periods. While Germany and Japan reached their highest growth rates of productivity before 1973, the US accelerated its rate of productivity growth in the second half of the 1990s. Between 1950 and 2000, the rate of productivity growth in the US of 2.9 percent per year was much lower than 6.3 percent in Japan and 4.7 percent in Germany. Between 1995 and 2000, the rate of productivity growth of the US of 4.6 percent exceeded that of Japan of 3.9 percent and the rate of Germany of 2.6 percent.
Chart II-1, US, Real GDP 1947-1999
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-2 provides the growth of real quarterly GDP in the US between 1947 and 2011. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery compared with return to trend at 3.0 percent from 1870 to 2010 after events such as wars and recessions (Lucas 2011May) and a standstill that can lead to growth recession, or low rates of economic growth, but perhaps even another contraction or conventional recession.
Chart II-2, US, Real GDP 1947-2012
Source:
US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-3 provides real GDP percentage change on the quarter a year earlier for 1983-1984. The objective is simply to compare expansion in two recoveries from sharp contractions as shown in Table II-2. Growth rates in the early phase of the recovery in 1983 and 1984 were very high, which is the opportunity to reduce unemployment that has characterized cyclical expansion in the postwar US economy.
Chart II-3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1985
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In contrast, growth rates in the comparable first fourteen quarters of expansion from 2009 to 2012 in Chart II-4 have been mediocre. As a result, growth has not provided the exit from unemployment and underemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions.
Chart II-4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table II-3 provides percentage change of real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Data are available for the 1930s only on a yearly basis. US GDP fell 4.8 percent in the two recessions (1) from IQ1980 to IIIQ1980 and (2) from III1981 to IVQ1981 to IVQ1982 and 4.7 percent cumulatively in the recession from IVQ2007 to IIQ2009. It is instructive to compare the first three years of the expansions in the 1980s and the current expansion. GDP grew at 4.5 percent in 1983, 7.2 percent in 1984 and 4.1 percent in 1985 while GDP grew, 2.4 percent in 2010, 1.8 percent in 2011 and 2.2 percent in 2012. Growth in the four quarters of 2012 accumulates to 1.5 percent. The US economy is growing in 2012 at the annual equivalent rate of 1.9 percent {([(1.021/4(1.013)1/4(1.0173)1/4(1.0254]-1)100 = 1.89%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding inventory divestment of 1.27 percentage points and reduction of national defense expenditures of 1.28 percentage points to obtain SAAR of IVQ2012 of 2.54 percent. GDP grew at 4.1 percent in 1985 and 3.5 percent in 1986 while the forecasts of participants of the Federal Open Market Committee (FOMC) are in the range of 1.7 to 1.8 percent in 2012 and 2.3 to 3.0 percent in 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf).
Table II-3, US, Percentage Change of GDP in the 1930s, 1980s and 2000s, ∆%
| Year | GDP ∆% | Year | GDP ∆% | Year | GDP ∆% |
| 1930 | -8.6 | 1980 | -0.3 | 2000 | 4.1 |
| 1931 | -6.5 | 1981 | 2.5 | 2001 | 1.1 |
| 1932 | -13.1 | 1982 | -1.9 | 2002 | 1.8 |
| 1933 | -1.3 | 1983 | 4.5 | 2003 | 2.5 |
| 1934 | 10.9 | 1984 | 7.2 | 2004 | 3.5 |
| 1935 | 8.9 | 1985 | 4.1 | 2005 | 3.1 |
| 1936 | 13.1 | 1986 | 3.5 | 2006 | 2.7 |
| 1937 | 5.1 | 1987 | 3.2 | 2007 | 1.9 |
| 1938 | -3.4 | 1988 | 4.1 | 2008 | -0.3 |
| 1930 | 8.1 | 1989 | 3.6 | 2009 | -3.1 |
| 1940 | 8.8 | 1990 | 1.9 | 2010 | 2.4 |
| 1941 | 17.1 | 1991 | -0.2 | 2011 | 1.8 |
| 1942 | 18.5 | 1992 | 3.4 | 2012 | 2.2 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart II-5 provides percentage change of GDP in the US during the 1930s. There is vast literature analyzing the Great Depression (Pelaez and Pelaez, Regulation of Banks and Finance (2009), 198-217). Cole and Ohanian (1999) find that US real per capita output was 11 percent lower in 1939 than in 1929 while the typical expansion of real per capita output in the US during a decade is 31 percent. Private hours worked in the US were 25 percent lower in 1939 relative to 1929.
Chart II-5, US, Percentage Change of GDP in the 1930s
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In contrast, Chart II-6 shows rapid recovery from the recessions in the 1980s. High growth rates in the initial quarters of expansion eliminated the unemployment and underemployment created during the contraction. The economy then returned to grow at the trend of expansion, interrupted by another contraction in 1991.
Chart II-6, US, Percentage Change of GDP in the 1980s
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-7 provides the rates of growth during the 2000s. Growth rates in the initial eleven quarters of expansion have been relatively lower than during recessions after World War II. As a result, unemployment and underemployment continue at the rate of 19.4 percent of the US labor force (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html) with weak hiring (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html).
Chart II-7, US, Percentage Change of GDP in the 2000s
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Characteristics of the four cyclical contractions are provided in Table II-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 4.7 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.
Table II-4, US, Number of Quarters, Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions
| Number of Quarters | Cumulative Percentage Contraction | Average Percentage Rate | |
| IIQ1953 to IIQ1954 | 4 | -2.5 | -0.63 |
| IIIQ1957 to IIQ1958 | 3 | -3.1 | -9.0 |
| IQ1980 to IIIQ1980 | 2 | -2.2 | -1.1 |
| IIIQ1981 to IVQ1982 | 4 | -2.7 | -0.67 |
| IVQ2007 to IIQ2009 | 6 | -4.7 | -0.80 |
Sources: Business Cycle Reference Dates: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Table II-5 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the fourteen quarters of the current cyclical expansion from IIIQ2009 to IVQ2012 and the average of 6.2 percent in the four earlier cyclical expansions. BEA data show the US economy in standstill with annual growth of 2.4 percent in 2010 decelerating to 1.8 percent annual growth in 2011, 2.2 percent in 2012 (http://www.bea.gov/iTable/index_nipa.cfm) and cumulative 1.6 percent in the four quarters of 2012 {[(1.02)1/4(1.013)1/4(1.031)1/4(0.999)1/4 – 1]100 = 1.6%} or 1.5 percent with minor rounding discrepancy using the SSAR of $13,647.6 billion in IVQ2012 relative to the SAAR of $13,441.0 billion in IVQ2011 {[($13647.6/$13441.00-1]100 = 1.5%}. The US economy is growing in 2012 at the annual equivalent rate of 1.9 percent {([(1.021/4(1.013)1/4(1.0173)1/4(1.0254)1/4]-1)100 = 1.89%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding inventory divestment of 1.27 percentage points and one-time reduction national defense expenditures of 1.28 percentage points to growth of -0.1 percent in IVQ2012 to obtain adjusted SAAR of 2.54 percent. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.
Table II-5, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions
| Number | Cumulative Growth ∆% | Average Annual Equivalent Growth Rate | |
| IIIQ 1954 to IQ1957 | 11 | 12.6 | 4.4 |
| IIQ1958 to IIQ1959 | 5 | 10.2 | 8.1 |
| IIQ1975 to IVQ1976 | 8 | 9.5 | 4.6 |
| IQ1983 to IQ1986 | 13 | 19.6 | 5.7 |
| Average Four Above Expansions | 6.2 | ||
| IIIQ2009 to IVQ2012 | 14 | 7.5 | 2.1 |
Sources: Business Cycle Reference Dates: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart II-8 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.
Chart II-8, US, Real GDP, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-9 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2012. The economy has underperformed during the first twelve quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.
Chart II-9, US, Real GDP, 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
As shown in Tables II-4 and II-5 above the loss of real GDP in the US during the contraction was 4.7 percent but the gain in the cyclical expansion has been only 7.5 percent (last row in Table II-5), using all latest revisions. As a result, the level of real GDP in IIQ2012 with the first estimate and revisions is only higher by 2.4 percent than the level of real GDP in IVQ2007. Table II-6 provides in the second column real GDP in billions of chained 2005 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.3 percent in IVQ2008 relative to the prior quarter and decline of 1.3 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.6 percent {[(1-0.023) x (1-0.013) -1]100 = -3.6%}, or {[(IQ2009 $12,711.0)/(IIIQ2008 $13,186.9) – 1]100 = -3.6%}. Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.1 percent in IIQ2009 but grew 0.4 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in five successive quarters from IVQ2009 to IVQ2010 of growth of 1.0 percent in IVQ2009 and equal growth at 0.6 percent in IQ2010, IIQ2010, IIIQ2010 and IVQ2010 for cumulative growth in those five quarters of 3.4 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.006 x 1.006 x 1.006 x 1.006) – 1]100 = 3.4%} or {[(IVQ2010 $13,181.2)/(IIIQ2009 $12,746.7) – 1]100 = 3.4%}. The economy lost momentum already in 2010 growing at 0.6 percent in each quarter, or annual equivalent 2.4 per cent {[(1.006)4 – 1]100 = 2.4%}, compared with annual equivalent 4.0 percent in IV2009 {[(1.01)4 – 1]100 = 4.0%}. The economy then stalled during the first half of 2011 with growth of 0.0025 percent in IQ2011 and 0.6 percent in IIQ2011 for combined annual equivalent rate of 1.2 percent {(1.00025 x 1.006)2}. The economy grew 0.3 percent in IIIQ2011 for annual equivalent growth of 1.2 percent in the first three quarters {[(1.00025 x 1.006 x 1.003)4/3 -1]100 = 1.2%}. Growth picked up in IVQ2011 with 1.0 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table II-6 slows from over 2.4 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 1.8 percent in IQ2011, 1.9 percent in IIQ2011, 1.6 percent in IIIQ2011 and 2.0 percent in IVQ2011. As shown below, growth of 1.0 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.5 percent relative to IVQ2011 and 2.4 percent relative to IQ2011, decelerating to 0.3 percent in IIQ2012 and 2.1 percent relative to IIQ2011 and 0.8 percent in IIIQ2012 and 2.6 percent relative to IIIQ2011 largely because of inventory accumulation and national defense expenditures. Growth was nil in IVQ2012 with 1.5 percent relative to a year earlier but mostly because of 1.27 percentage points of inventory divestment and 1.28 percentage points of reduction of one-time national defense expenditures. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area is one of the common sources of doubts on the rate and direction of economic growth in the US but there is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.
Table II-6, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%
| Real GDP, Billions Chained 2005 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| IVQ2007 | 13,326.0 | NA | NA | 2.2 |
| IQ2008 | 13,266.8 | -0.4 | -0.4 | 1.6 |
| IIQ2008 | 13,310.5 | -0.1 | 0.3 | 1.0 |
| IIIQ2008 | 13,186.9 | -1.0 | -0.9 | -0.6 |
| IVQ2008 | 12,883.5 | -3.3 | -2.3 | -3.3 |
| IQ2009 | 12,711.0 | -4.6 | -1.3 | -4.2 |
| IIQ2009 | 12,701.0 | -4.7 | -0.1 | -4.6 |
| IIIQ2009 | 12,746.7 | -4.3 | 0.4 | -3.3 |
| IV2009 | 12,873.1 | -3.4 | 1.0 | -0.1 |
| IQ2010 | 12,947.6 | -2.8 | 0.6 | 1.9 |
| IIQ2010 | 13,019.6 | -2.3 | 0.6 | 2.5 |
| IIIQ2010 | 13,103.5 | -1.7 | 0.6 | 2.8 |
| IVQ2010 | 13,181.2 | -1.1 | 0.6 | 2.4 |
| IQ2011 | 13,183.8 | -1.1 | 0.0 | 1.8 |
| IIQ2011 | 13,264.7 | -0.5 | 0.6 | 1.9 |
| IIIQ2011 | 13,306.9 | -0.1 | 0.3 | 1.6 |
| IV2011 | 13,441.0 | 0.9 | 1.0 | 2.0 |
| IQ2012 | 13,506.4 | 1.4 | 0.5 | 2.4 |
| IIQ2012 | 13,548.5 | 1.7 | 0.3 | 2.1 |
| IIIQ2012 | 13,652.5 | 2.5 | 0.8 | 2.6 |
| IVQ2012 | 13,647.6 | 2.4 | 0.0 | 1.5 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart II-10 provides the percentage change of real GDP from the same quarter a year earlier from 1980 to 1989. There were two contractions almost in succession in 1980 and from 1981 to 1983. The expansion was marked by initial high rates of growth as in other recession in the postwar US period during which employment lost in the contraction was recovered. Growth rates continued to be high after the initial phase of expansion.
Chart II-10, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The experience of recovery after 2009 is not as complete as during the 1980s. Chart II-11 shows the much lower rates of growth in the early phase of the current expansion and how they have sharply declined from an early peak. The US missed the initial high growth rates in cyclical expansions during which unemployment and underemployment are eliminated.
Chart II-11, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-12 provides growth rates from a quarter relative to the prior quarter during the 1980s. There is the same strong initial growth followed by a long period of sustained growth.
Chart II-12, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-13 provides growth rates in a quarter relative to the prior quarter from 2007 to 2012. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.
Chart II-13, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The revised estimates and earlier estimates from IQ2008 to IQ2012 in seasonally adjusted annual equivalent rates are shown in Table II-7. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent but then lowered to contraction of 5.3 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent and then increased to 4.0 percent. Growth in IQ2010 is lowered from 3.9 percent to 2.3 percent. Growth in IIQ2010 is upwardly revised to 3.8 percent but then lowered to 2.2 percent. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession with higher risks of contraction.
Table II-7, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA, Revised and Earlier Estimates
| Quarters | Revised Estimate Jul 27, 2012 | Revised Estimate Jul 29, 2011 | Earlier Estimate |
| 2008 | |||
| I | -1.8 | -0.7 | |
| II | 1.3 | 0.6 | |
| III | -3.7 | -4.0 | |
| IV | -8.9 | -6.8 | |
| 2009 | |||
| I | -5.3 | -6.7 | -4.9 |
| II | -0.3 | -0.7 | -0.7 |
| III | 1.4 | 1.7 | 1.6 |
| IV | 4.0 | 3.8 | 5.0 |
| 2010 | |||
| I | 2.3 | 3.9 | 3.7 |
| II | 2.2 | 3.8 | 1.7 |
| III | 2.6 | 2.5 | 2.6 |
| IV | 2.4 | 2.3 | 3.1 |
| 2011 | |||
| I | 0.1 | 0.4 | 1.9 |
| II | 2.5 | ||
| III | 1.3 | ||
| IV | 4.1 | ||
| 2012 | |||
| I | 2.0 | ||
| II | 1.3 | ||
| III | 3.1 | ||
| IV | -0.1 |
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase in IQ1983 to IIQ1984 than in IIIQ2009 to IIIQ2012, as shown in Table II-8. GDI provided the impulse of growth in 1983 and 1984, which has not been the case from 2009 to 2012. The investment decision in the US economy has been frustrated in the current cyclical expansion. Growth of GDP in IVQ2012 at seasonally-adjusted rate of -0.1 percent consisted of positive contribution of 1.52 percentage points of personal consumption expenditures (PCE) less negative deductions of 0.08 percentage points of gross private domestic investment (GDI) of which 1.27 percentage points of inventory divestment (∆PI), negative net exports (trade or exports less imports) of 0.25 percentage points and negative 1.33 of government consumption expenditures and gross investment (GOV) mostly because of one-time reduction of national defense expenditures of 1.28 percentage points. Growth of GDP in IIIQ2012 of 3.1 percent at seasonally-adjusted annual rate (SAAR) consisted of positive contributions of 1.12 percentage points of personal consumption expenditures (PCE) + 0.85 percentage points of gross domestic investment (GDI) but inventory change adding 0.73 percentage points (∆ PI) plus 0.38 percentage points of net exports (net trade or exports less imports) plus 0.75 percentage points of government consumption expenditures and gross investment (GOV) but national defense expenditures adding 0.64 percentage points. While the contribution of personal consumption expenditures decreased from 1.72 percentage points in IQ2012 to 1.06 percentage points in IIIQ2012 and 1.12 percentage points in IIIQ2012, the contribution of government expenditures increased from deduction of 0.14 percentage points in IIQ2012 to adding 0.75 percentage points in IIIQ2012. The bulk of the contribution of government consisted of 0.64 percentage points of one-time national defense expenditures resulting from growth of national defense expenditures at the seasonally adjusted annual rate (SAAR) of 12.9 percent in IIIQ2012. In IVQ2012, national defense expenditures fell at the SAAR of 22.2 percent, deducting 1.28 percentage points from GDP growth. The contribution of PCE fell from 1.72 percentage points in IQ2012 to 1.06 percentage points in IIQ2012 and 1.12 percentage points in IIIQ2012 as savings decreased but increased to contribution of 1.52 percentage points in IVQ2012. The contribution of GDI decreased from 0.78 percentage points in IQ2012 to 0.09 percentage points in IIQ2012 and 0.85 percentage points in IIIQ2012 with inventory accumulation adding 0.73 percentage points in IIIQ2012 relative to deduction of 0.46 percentage points in IIQ2012. GDI deducted 0.08 percentage points from growth in IVQ2012 mostly because of inventory divestment of 1.27 percentage points. Growth in IVQ2011 was driven mainly by increase in private inventories of 2.53 percentage points. The economy of the United States has lost the dynamic growth impulse of earlier cyclical expansions with mediocre growth resulting from consumption forced by one-time effects of financial repression, national defense expenditures and inventory accumulation.
Table II-8, US, Contributions to the Rate of Growth of GDP in Percentage Points
| GDP | PCE | GDI | ∆ PI | Trade | GOV | |
| 2012 | ||||||
| I | 2.0 | 1.72 | 0.78 | -0.39 | 0.06 | -0.60 |
| II | 1.3 | 1.06 | 0.09 | -0.46 | 0.23 | -0.14 |
| III | 3.1 | 1.12 | 0.85 | 0.73 | 0.38 | 0.75 |
| IV | -0.1 | 1.52 | -0.08 | -1.27 | -0.25 | -1.33 |
| 2011 | ||||||
| I | 0.1 | 2.22 | -0.68 | -0.54 | 0.03 | -1.49 |
| II | 2.5 | 0.70 | 1.40 | 0.01 | 0.54 | -0.16 |
| III | 1.3 | 1.18 | 0.68 | -1.07 | 0.02 | -0.60 |
| IV | 4.1 | 1.45 | 3.72 | 2.53 | -0.64 | -0.43 |
| 2010 | ||||||
| I | 2.3 | 1.72 | 2.13 | 2.23 | -0.83 | -0.69 |
| II | 2.2 | 1.81 | 1.65 | 0.07 | -1.81 | 0.59 |
| III | 2.6 | 1.75 | 1.87 | 1.97 | -0.95 | -0.06 |
| IV | 2.4 | 2.84 | -0.75 | -1.61 | 1.24 | -0.94 |
| 2009 | ||||||
| I | -5.3 | -1.06 | -7.02 | -2.29 | 2.45 | 0.37 |
| II | -0.3 | -1.21 | -3.52 | -1.03 | 2.47 | 1.94 |
| III | 1.4 | 1.50 | -0.14 | 0.19 | -0.70 | 0.79 |
| IV | 4.0 | -0.01 | 3.85 | 4.55 | -0.05 | 0.23 |
| 1982 | ||||||
| I | -6.4 | 1.62 | -7.50 | -5.47 | -0.49 | -0.03 |
| II | 2.2 | 0.90 | -0.05 | 2.35 | 0.84 | 0.50 |
| III | -1.5 | 1.92 | -0.72 | 1.15 | -3.31 | 0.57 |
| IV | 0.3 | 4.64 | -5.66 | -5.48 | -0.10 | 1.44 |
| 1983 | ||||||
| I | 5.1 | 2.54 | 2.20 | 0.94 | -0.30 | 0.63 |
| II | 9.3 | 5.22 | 5.87 | 3.51 | -2.54 | 0.75 |
| III | 8.1 | 4.66 | 4.30 | 0.60 | -2.32 | 1.48 |
| IV | 8.5 | 4.20 | 6.84 | 3.09 | -1.17 | -1.35 |
| 1984 | ||||||
| I | 8.0 | 2.35 | 7.15 | 5.07 | -2.37 | 0.86 |
| II | 7.1 | 3.75 | 2.44 | -0.30 | -0.89 | 1.79 |
| III | 3.9 | 2.02 | 1.67 | 0.21 | -0.36 | 0.62 |
| IV | 3.3 | 3.38 | -1.26 | -2.50 | -0.58 | 1.75 |
| 1985 | ||||||
| I | 3.8 | 4.34 | -2.38 | -2.94 | 0.91 | 0.95 |
| II | 3.4 | 2.35 | 1.24 | 0.35 | -2.01 | 1.85 |
| III | 6.4 | 4.91 | -0.68 | -0.16 | -0.01 | 2.18 |
| IV | 3.1 | 0.54 | 2.72 | 1.45 | -0.68 | 0.50 |
Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive
GDP: percent change at annual rate; percentage points at annual rates
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The Bureau of Economic Analysis (BEA) (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_adv.pdf 1) explains growth of GDP in IVQ2012 as follows:
“The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.
The downturn in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE. “
There are positive contributions to growth in IVQ2012 shown in Table II-9:
· Personal consumption expenditures (PCE) growing at 1.2 percent with increasing consumption of durable goods
· Residential fixed investment (RFI) growing at 15.3 percent
· Nonresidential fixed investment growing 8.4 percent
· Decline of imports, which are a deduction of growth, at 3.2 percent
There were negative contributions in IVQ2012:
· Federal government expenditures declining at 15.0 percent mostly because of decline of national defense expenditures at 22.2 percent that deducted 1.28 percentage points from GDP growth
· Private inventory divestment that deducted 1.27 percentage points from GDP growth
· Exports falling at a rate of 5.7 percent higher than the rate of decline of 3.2 percent of imports
· Reduction of consumption expenditures and gross investment of state and local government at 0.7 percent
The BEA explains downturn in real GDP in IVQ2012 by:
· Contraction of government expenditures in consumption and gross investment of 6.6 percent mostly because of contraction at 15.0 percent of federal government expenditures in consumption and gross investment primarily because of contraction of national defense expenditures at 22.2 percent for deduction of 1.28 percentage points from GDP growth
· Deceleration of growth of exports at 1.9 percent in IIIQ2012 to minus 5.7 percent in IVQ2012 while imports fell at a lower rate of 3.2 percent
· Subtraction of 0.08 percentage points of growth by gross private domestic investment mostly because of inventory divestment of 1.28 percentage points
Table II-9, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %
| IVQ 2011 | IQ 2012 | IIQ 2012 | IIIQ 2012 | IVQ 2012 | |
| GDP | 4.1 | 2.0 | 1.3 | 3.1 | -0.1 |
| PCE | 2.0 | 2.4 | 1.5 | 1.6 | 2.2 |
| Durable Goods | 13.9 | 11.5 | -0.2 | 8.9 | 13.9 |
| NRFI | 9.5 | 7.5 | 3.6 | -1.8 | 8.4 |
| RFI | 12.1 | 20.5 | 8.5 | 13.5 | 15.3 |
| Exports | 1.4 | 4.4 | 5.3 | 1.9 | -5.7 |
| Imports | 4.9 | 3.1 | 2.8 | -0.6 | -3.2 |
| GOV | -2.2 | -3.0 | -0.7 | 3.9 | -6.6 |
| Federal GOV | -4.4 | -4.2 | -0.2 | 9.5 | -15.0 |
| National Defense | -10.6 | -7.1 | -0.2 | 12.9 | -22.2 |
| Cont to GDP Growth % Points | -0.60 | -0.39 | -0.01 | 0.64 | -1.28 |
| State/Local GOV | -0.7 | -2.2 | -1.0 | 0.3 | -0.7 |
| ∆ PI (PP) | 2.53 | -0.39 | -0.46 | 0.73 | -1.27 |
| Final Sales of Domestic Product | 1.5 | 2.4 | 1.7 | 2.4 | 1.1 |
| Gross Domestic Purchases | 4.6 | 1.8 | 1.0 | 2.6 | 0.1 |
| Prices Gross | 0.9 | 2.5 | 0.7 | 1.4 | 1.3 |
| Prices of GDP | 0.4 | 2.0 | 1.6 | 2.7 | 0.6 |
| Prices of GDP Excluding Food and Energy | 0.9 | 2.6 | 1.4 | 1.3 | 1.1 |
| Prices of PCE | 1.1 | 2.5 | 0.7 | 1.6 | 1.2 |
| Prices of PCE Excluding Food and Energy | 1.3 | 2.2 | 1.7 | 1.1 | 0.9 |
| Prices of Market Based PCE | 1.2 | 2.5 | 0.6 | 1.9 | 1.2 |
| Prices of Market Based PCE Excluding Food and Energy | 1.5 | 2.2 | 1.8 | 1.3 | 0.8 |
| Real Disposable Personal Income* | 0.3 | 0.2 | 1.1 | 1.6 | 3.3 |
| Personal Savings As % Disposable Income | 3.4 | 3.6 | 3.8 | 3.6 | 4.7 |
Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in
private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income
*Percent change from quarter one year ago
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Percentage shares of GDP are shown in Table II-10. PCE is equivalent to 71.1 percent of GDP and is under pressure with stagnant real disposable income, high levels of unemployment and underemployment and higher savings rates than before the global recession, temporarily interrupted by financial repression in the form of zero interest rates. Gross private domestic investment is also growing slowly even with about two trillions of dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth. Bouts of risk aversion revalue the dollar relative to most currencies in the world as investors increase their holdings of dollar-denominated assets.
Table II-10, US, Percentage Shares of GDP, %
| IVQ2012 | |
| GDP | 100.0 |
| PCE | 71.1 |
| Goods | 24.2 |
| Durable | 7.9 |
| Nondurable | 16.3 |
| Services | 46.8 |
| Gross Private Domestic Investment | 13.2 |
| Fixed Investment | 13.0 |
| NRFI | 10.4 |
| Structures | 2.9 |
| Equipment & Software | 7.5 |
| RFI | 2.6 |
| Change in Private | 0.2 |
| Net Exports of Goods and Services | -3.5 |
| Exports | 13.7 |
| Goods | 9.6 |
| Services | 4.1 |
| Imports | 17.3 |
| Goods | 14.4 |
| Services | 2.9 |
| Government | 19.3 |
| Federal | 7.6 |
| National Defense | 5.0 |
| Nondefense | 2.6 |
| State and Local | 11.7 |
PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Table II-11 shows percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009, 2010, 2011 and 2012. The data incorporate the new revisions released by the BEA on Jul 29, 2011 and Jul 27, 2012 and the first estimate of IVQ2012 GDP released on Jan 30, 2013. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 7.2 percent in 1959, 4.5 percent in 1983 followed by 7.2 percent in 1984 and 4.1 percent in 1985 but only 2.4 percent in 2010 after six consecutive quarters of growth, 1.8 percent in 2011 after ten consecutive quarters of expansion and 2.2 percent in 2012 after 14 quarters of expansion. Annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions than in the expansion after the global recession of 2007. Gross domestic investment was much stronger in the earlier expansions than in 2010, 2011 and 2012.
Table II-11, US, Percentage Point Contributions to the Annual Growth Rate of GDP
| GDP | PCE | GDI | ∆ PI | Trade | GOV | |
| 1958 | -0.9 | 0.54 | -1.25 | -0.18 | -0.89 | 0.70 |
| 1959 | 7.2 | 3.61 | 2.80 | 0.86 | 0.00 | 0.76 |
| 1975 | -0.2 | 1.40 | -2.98 | -1.27 | 0.89 | 0.48 |
| 1976 | 5.4 | 3.51 | 2.84 | 1.41 | -1.08 | 0.10 |
| 1982 | -1.9 | 0.86 | -2.55 | -1.34 | -0.60 | 0.35 |
| 1983 | 4.5 | 3.65 | -1.45 | 0.29 | -1.35 | 0.76 |
| 1984 | 7.2 | 3.43 | 4.63 | 1.95 | -1.58 | 0.70 |
| 1985 | 4.1 | 3.32 | -0.17 | -1.06 | -0.42 | 1.41 |
| 2009 | -3.1 | -1.36 | -3.59 | -0.78 | 1.14 | 0.74 |
| 2010 | 2.4 | 1.28 | 1.50 | 1.52 | -0.52 | 0.14 |
| 2011 | 1.8 | 1.79 | 0.62 | -0.14 | 0.07 | -0.67 |
| 2012 | 2.2 | 1.34 | 1.18 | 0.16 | 0.00 | -0.34 |
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table II-12 provides more detail of the contributions to growth of GDP from 2009 to 2012 using annual-level data. PCEs contributed 1.28 PPs to GDP growth in 2010 of which 0.82 percentage points (PP) in goods and 0.46 PP in services. Gross private domestic investment (GPDI) deducted 3.59 PPs of GDP growth in 2009 of which -2.80 PPs by fixed investment and -0.78 PPs of inventory change (∆PI) and added 1.50 PPs of GPDI in 2010 of which minus 0.03 PPs of fixed investment and 1.52 PPs of inventory accumulation (∆PI). Trade, or exports of goods and services net of imports, contributed 1.14 PPs in 2009 of which exports deducted 1.14 PPs and imports added 2.28 PPs. In 2010, trade deducted 0.52 PPs with exports contributing 1.29 PPs and imports deducting 1.81 PPs likely benefitting from dollar devaluation. In 2009, government added 0.74 PP of which 0.46 PPs by the federal government and 0.28 PPs by state and local government; in 2010, government added 0.14 PPs of which 0.37 PPs by the federal government with state and local government deducting 0.23 PPs. The final two columns of Table II-12 provide the estimate for 2011. PCE contributed 1.79 PPs in 2011 after 1.28 PPs in 2010. The contribution of PCE fell to 1.34 points in 2012. The breakdown into goods and services is similar but with declining contributions in 2012 of goods, 0.74 PPs, and services, 0.60 PPs. Gross private domestic investment contributed 1.50 PPs in 2010 with addition of 1.52 PPs of change of private inventories but the contribution of gross private domestic investment was only 0.62 PPs in 2011. The contribution of GPDI in 2012 increased to 1.18 PPs with fixed investment increasing its contribution to 1.02 PPs and residential investment contributing 0.27 PPs for the first time since 2009. Net exports of goods and services contributed marginally in 2011 with 0.07 PPs and nothing in 2012. The contribution of exports fell from 1.29 PPs in 2010 and 0.87 PPs in 2011 to only 0.44 PPs in 2012. Government deducted 0.67 PPs in 2011 and 0.34 PPs in 2012. The expansion since IIIQ2009 has been characterized by weak contributions of aggregate demand, which is the sum of personal consumption expenditures plus gross private domestic investment. The US did not recover strongly from the global recessions as typical in past cyclical expansions. Recoveries tend to be more sluggish as expansions mature. At the margin in IVQ2011 the acceleration of expansion was driven by inventory accumulation instead of aggregate demand of consumption and investment. Growth of PCE was partly the result of burning savings because of financial repression, which may not be sustainable in the future.
Table II-12, US, Contributions to Growth of Gross Domestic Product in Percentage Points
| 2009 | 2010 | 2011 | 2012 | |
| GDP Growth ∆% | -3.1 | 2.4 | 1.8 | 2.2 |
| Personal Consumption Expenditures (PCE) | -1.36 | 1.28 | 1.79 | 1.34 |
| Goods | -0.69 | 0.82 | 0.89 | 0.74 |
| Durable | -0.41 | 0.45 | 0.53 | 0.58 |
| Nondurable | -0.28 | 0.37 | 0.36 | 0.16 |
| Services | -0.67 | 0.46 | 0.90 | 0.60 |
| Gross Private Domestic Investment (GPDI) | -3.59 | 1.50 | 0.62 | 1.18 |
| Fixed Investment | -2.80 | -0.03 | 0.76 | 1.02 |
| Nonresidential | -2.08 | 0.07 | 0.80 | 0.75 |
| Structures | -0.85 | -0.50 | 0.07 | 0.26 |
| Equipment, software | -1.23 | 0.56 | 0.72 | 0.49 |
| Residential | -0.73 | -0.09 | -0.03 | 0.27 |
| Change Private Inventories | -0.78 | 1.52 | -0.14 | 0.16 |
| Net Exports of Goods and Services | 1.14 | -0.52 | 0.07 | 0.00 |
| Exports | -1.14 | 1.29 | 0.87 | 0.44 |
| Goods | -1.05 | 1.11 | 0.65 | 0.39 |
| Services | -0.10 | 0.18 | 0.22 | 0.05 |
| Imports | 2.28 | -1.81 | -0.80 | -0.44 |
| Goods | 2.19 | -1.74 | -0.72 | -0.32 |
| Services | 0.09 | -0.07 | -0.08 | -0.12 |
| Government Consumption Expenditures and Gross Investment | 0.74 | 0.14 | -0.67 | -0.34 |
| Federal | 0.46 | 0.37 | -0.23 | -0.18 |
| National Defense | 0.31 | 0.17 | -0.15 | -0.17 |
| Nondefense | 0.16 | 0.20 | -0.09 | -0.01 |
| State and Local | 0.28 | -0.23 | -0.43 | -0.16 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Manufacturing jobs increased 4,000 in Jan 2013 relative to Dec 2012, seasonally adjusted but decreased 90,000 in Jan 2013 relative to Dec 2012, not seasonally adjusted, as shown in Table II-13, because of the weaker economy and international trade together with the yearly adjustment of labor statistics. In the six months ending in Dec 2012, United States national industrial production accumulated increase of 0.9 percent at the annual equivalent rate of 1.8 percent, which is lower than 2.2 percent growth in 12 months. Capacity utilization for total industry in the United States increased 0.1 percentage points in Dec to 78.8 percent from 78.7 percent in Nov, which is 1.5 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 0.8 percent in Dec seasonally adjusted, increasing 1.8 percent not seasonally adjusted in 12 months, and increased 0.7 percent in the six months ending in Dec or at the annual equivalent rate of 1.4 percent (Section VA at http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html and earlier http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html). Table II-13 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.3 percent in US national income in IIQ2012 and 86.4 percent in IIIQ2012. Most of US national income is in the form of services. In Jan 2013, there were 132.705 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 110.965 million NSA in Jan 2013 accounted for 82.6 percent of total nonfarm jobs of 132.705 million, of which 11.846 million, or 10.7 percent of total private jobs and 8.9 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 92.929 million NSA in Jan 2013, or 70.0 percent of total nonfarm jobs and 83.8 percent of total private-sector jobs. Manufacturing has share of 11.2 percent in US national income in IIQ2011 and 11.1 percent in IIIQ2012, as shown in Table II-13. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.
Table II-13, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total
| SAAR | % Total | SAAR IIIQ2012 | % Total | |
| National Income WCCA | 13,833.6 | 100.0 | 13,969.4 | 100.0 |
| Domestic Industries | 13,586.3 | 98.2 | 13,726.2 | 98.3 |
| Private Industries | 11,933.2 | 86.3 | 12,067.6 | 86.4 |
| Agriculture | 131.7 | 0.9 | 138.7 | 1.0 |
| Mining | 208.3 | 1.5 | 203.2 | 1.5% |
| Utilities | 214.6 | 1.6 | 216.8 | 1.6 |
| Construction | 583.7 | 4.2 | 592.7 | 4.2 |
| Manufacturing | 1548.1 | 11.2 | 1552.5 | 11.1 |
| Durable Goods | 894.3 | 6.5 | 895.6 | 6.4 |
| Nondurable Goods | 653.8 | 4.7 | 656.9 | 4.7 |
| Wholesale Trade | 853.5 | 6.2 | 837.9 | 6.0 |
| Retail Trade | 951.9 | 6.9 | 959.8 | 6.9 |
| Transportation & WH | 414.5 | 3.0 | 414.9 | 3.0 |
| Information | 499.1 | 3.6 | 499.6 | 3.6 |
| Finance, Insurance, RE | 2237.5 | 16.2 | 2324.6 | 16.6 |
| Professional, BS | 1971.7 | 14.3 | 1997.2 | 14.3 |
| Education, Health Care | 1378.1 | 10.0 | 1385.7 | 9.9 |
| Arts, Entertainment | 540.4 | 3.9 | 540.5 | 3.9 |
| Other Services | 400.0 | 2.9 | 403.6 | 2.9 |
| Government | 1653.0 | 11.9 | 1658.6 | 11.9 |
| Rest of the World | 247.3 | 1.8 | 243.1 | 1.7 |
Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
IA1. Contracting Real Private Fixed Investment. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions. In the cyclical expansions since 1950, US GDP has grown at the average rate of 6.2 percent, moving the economy back to long-term trend. Growth of GDP has been only 2.1 percent on average during the current cyclical expansion from IIIQ2009 to IVQ2012. Weakness in the current cyclical expansion has occurred in growth, labor markets and wealth, as analyzed in IB Collapse of United States Dynamism of Income Growth and Employment Creation incorporating additional data on private investment. Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Table IIA1-1 provides quarterly seasonally adjusted annual rates (SAAR) of growth of private fixed investment for the recessions of the 1980s and the current economic cycle. In the cyclical expansion beginning in IQ1983 (http://www.nber.org/cycles.html), real private fixed investment in the United States grew at the average annual rate of 15.3 percent in the first eight quarters from IQ1983 to IVQ1984. Growth rates fell to an average of 1.6 percent in the following eight quarters from IQ1985 to IVQ1986. There were only three quarters of contraction of private fixed investment from IQ1983 to IVQ1986. There is quite different behavior of private fixed investment in the fourteen quarters of cyclical expansion from IIIQ2009 to IVQ2012. The average annual growth rate in the first eight quarters of expansion from IIIQ2009 to IIQ2011 was 2.5 percent, which is significantly lower than 15.3 percent in the first eight quarters of expansion from IQ1983 to IVQ1984. There is only strong growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 11.9 percent. Growth has fallen from the SAAR of 15.5 percent in IIIQ2011 to 0.9 percent in IIIQ2012. Sudeep Reddy and Scott Thurm, writing on “Investment falls off a cliff,” on Nov 18, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324595904578123593211825394.html?mod=WSJPRO_hpp_LEFTTopStories) analyze the decline of private investment in the US and inform that a review by the Wall Street Journal of filing and conference calls finds that 40 of the largest publicly traded corporations in the US have announced intentions to reduce capital expenditures in 2012. The SAAR of real private fixed investment jumped to 9.7 percent in IVQ2012.
Table IIA1-1, US, Quarterly Growth Rates of Real Private Fixed Investment, % Annual Equivalent SA
| Q | 1981 | 1982 | 1983 | 1984 | 2008 | 2009 | 2010 |
| I | 3.0 | -11.6 | 9.0 | 13.1 | -8.3 | -30.2 | -0.9 |
| II | 2.7 | -13.3 | 16.4 | 17.5 | -5.2 | -18.5 | 14.5 |
| III | 0.0 | -10.7 | 26.1 | 8.8 | -12.3 | -3.1 | -1.0 |
| IV | -1.4 | 0.6 | 25.6 | 7.4 | -25.2 | -6.0 | 7.6 |
| 1985 | 2011 | ||||||
| I | 3.1 | -1.3 | |||||
| II | 5.1 | 12.4 | |||||
| III | -3.2 | 15.5 | |||||
| IV | 7.8 | 10.0 | |||||
| 1986 | 2012 | ||||||
| I | 0.6 | 9.8 | |||||
| II | -1.0 | 4.5 | |||||
| III | -2.2 | 0.9 | |||||
| IV | 2.7 | 9.7 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA1-1 of the US Bureau of Economic Analysis (BEA) provides seasonally-adjusted annual rates of growth of real private fixed investment from 1981 to 1986. Growth rates recovered sharply during the first eight quarters, which was essential in returning the economy to trend growth and eliminating unemployment and underemployment accumulated during the contractions.
Chart IIA1-1, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 1981-1986
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Weak behavior of real private fixed investment from 2007 to 2012 is shown in Chart IIA1-2. Growth rates of real private fixed investment were much lower during the initial phase of expansion in the current economic cycle and have entered sharp trend of decline.
Chart IIA1-2, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table IIA1-2 provides real private fixed investment at seasonally-adjusted annual rates from IVQ2007 to IVQ2012 or for the complete economic cycle. The first column provides the quarter, the second column percentage change relative to IVQ2007, the third column the quarter percentage change in the quarter relative to the prior quarter and the final column percentage change in a quarter relative to the same quarter a year earlier. In IQ1980 gross private domestic investment in the US was $778.3 billion of 2005 dollars, growing to $965.9 billion in IVQ1985 or 24.1 percent, as shown in Table IB-2 of IB Collapse of Dynamism of United States Income Growth and Employment Creation. Gross private domestic investment in the US decreased 9.3 percent from $2,123.6 billion of 2005 dollars in IVQ2007 to $1,925.8 billion in IVQ2012 (Table IB-2). As shown in Table IIAI-2, real private fixed investment fell 10.6 percent from $2111.5 billion of 2005 dollars in IVQ2007 to $1888.0 billion in IVQ2012. Growth of real private investment in Table IIA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012.
Table IIA1-2, US, Real Private Fixed Investment and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions of Chained 2005 Dollars and ∆%
| Real PFI, Billions Chained 2005 Dollars | ∆% Relative to IVQ2007 | ∆% Relative to Prior Quarter | ∆% | |
| IVQ2007 | 2111.5 | NA | -1.2 | -1.0 |
| IQ2008 | 2066.4 | -2.1 | -2.1 | -2.9 |
| IIQ2008 | 2039.1 | -3.4 | -1.3 | -5.0 |
| IIIQ2008 | 1973.5 | -6.5 | -3.2 | -7.7 |
| IV2008 | 1835.4 | -13.1 | -7.0 | -13.1 |
| IQ2009 | 1677.3 | -20.6 | -8.6 | -18.8 |
| IIQ2009 | 1593.7 | -24.5 | -5.0 | -21.8 |
| IIIQ2009 | 1581.2 | -25.1 | -0.8 | -19.9 |
| IVQ2009 | 1556.8 | -26.3 | -1.5 | -15.2 |
| IQ2010 | 1553.1 | -26.4 | -0.2 | -7.4 |
| IIQ2010 | 1606.5 | -23.9 | 3.4 | 0.8 |
| IIIQ2010 | 1602.7 | -24.1 | -0.2 | 1.4 |
| IVQ2010 | 1632.3 | -22.7 | 1.8 | 4.8 |
| IQ2011 | 1627.0 | -22.9 | -0.3 | 4.8 |
| IIQ2011 | 1675.4 | -20.7 | 3.0 | 4.3 |
| IIIQ2011 | 1736.8 | -17.7 | 3.7 | 8.4 |
| IVQ2011 | 1778.7 | -15.8 | 2.4 | 9.0 |
| IQ2012 | 1820.6 | -13.8 | 2.4 | 11.9 |
| IIQ2012 | 1840.6 | -12.8 | 1.1 | 9.9 |
| IIIQ2012 | 1844.8 | -12.6 | 0.2 | 6.2 |
| IVQ2012 | 1888.0 | -10.6 | 2.3 | 6.1 |
PFI: Private Fixed Investment
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA1-3 provides real private fixed investment in billions of chained 2005 dollars from IV2007 to IVQ2012. Real private fixed investment has not recovered, stabilizing at a level in IVQ2012 that is 10.6 percent below the level in IVQ2007.
Chart IIA1-3, US, Real Private Fixed Investment, Billions of Chained 2005 Dollars, IQ2007 to IVQ2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA1-4 provides real gross private domestic investment in chained dollars of 2005 from 1980 to 1986. Real gross private domestic investment climbed 24.1 percent in IVQ1985 above the level on IQ1980.
Chart IIA1-4, US, Real Gross Private Domestic Investment, Billions of Chained 2005 Dollars at Seasonally Adjusted Annual Rate, 1980-1986
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA1-5 provides real gross private domestic investment in the United States in billions of dollars of 2005 from 2006 to 2012. Gross private domestic investment reached a level in IVQ2012 that was 9.3 percent lower than the level in IVQ2007.
Chart IIA1-5, US, Real Gross Private Domestic Investment, Billions of Chained 2005 Dollars at Seasonally Adjusted Annual Rate, 2006-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table IIA1-3 provides percentage shares in GDP of gross private domestic investment and its components in IVQ2012, IQ2006 and IQ2000. The share of gross private domestic investment in GDP has fallen from 17.4 percent in IQ2000 and 17.8 percent in IQ2006 to 13.2 percent in IVQ2012. There are declines in percentage shares in GDP of all components with sharp reduction of residential investment from 4.6 percent in IQ2000 and 6.2 percent in IQ2006 to 2.6 percent in IVQ2012. The share of fixed investment in GDP fell from 17.2 percent in IQ2000 and 17.3 percent in IQ2006 to 13.0 percent in IVQ2012.
Table IIA1-3, Percentage Shares of Gross Private Domestic Investment and Components in Gross Domestic Product, % of GDP, IIIQ2012
| IVQ2012 | IQ2006 | IQ2000 | |
| Gross Private Domestic Investment | 13.2 | 17.8 | 17.4 |
| Fixed Investment | 13.0 | 17.3 | 17.2 |
| Nonresidential | 10.4 | 11.1 | 12.6 |
| Structures | 2.9 | 3.0 | 3.1 |
| Equipment and Software | 7.5 | 8.1 | 9.5 |
| Residential | 2.6 | 6.2 | 4.6 |
| Change in Private Inventories | 0.2 | 0.5 | 0.2 |
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Broader perspective is provided in Chart IIA1-6 with the percentage share of gross private domestic investment in GDP in annual data from 1929 to 2012. There was sharp drop during the current economic cycle with almost no recovery in contrast with sharp recovery after the recessions of the 1980s.
Chart IIA1-6, US, Percentage Share of Gross Domestic Investment in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA1-7 provides percentage shares of private fixed investment in GDP with annual data from 1929 to 2012. The sharp contraction after the recessions of the 1980s was followed by sustained recovery while the sharp drop in the current economic cycle has not been recovered.
Chart IIA1-7, US, Percentage Share of Private Fixed Investment in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA1-8 provides percentage shares in GDP of nonresidential investment from 1929 to 2012. There is again recovery from sharp contraction in the 1980s but inadequate recovery in the current economic cycle.
Chart IIA1-8, US, Percentage Share of Nonresidential Investment in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA1-9 provides percentage shares of business equipment and software in GDP with annual data from 1929 to 2012. There is again inadequate recovery in the current economic cycle.
Chart IIA1-9, US, Percentage Share of Business Equipment and Software in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA1-10 provides percentage shares of residential investment in GDP with annual data from 1929 to 2012. The salient characteristic of Chart IIA1-10 is the vertical increase of the share of residential investment in GDP up to 2006 and subsequent collapse.
Chart IIA1-10, US, Percentage Share of Residential Investment in Gross Domestic Product, Annual, 1929-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Finer detail is provided by the quarterly share of residential investment in GDP from 1979 to 2012 in Chart IIA1-11. There was protracted growth of that share that accelerated sharply into 2006 followed with nearly vertical drop. The explanation of the sharp contraction of United States housing can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:
“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”
Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:
“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”
There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.
The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:
W = Y/r (1)
Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.
Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).
The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).
Chart IIA1-11, US, Percentage Share of Residential Investment in Gross Domestic Product, Quarterly, 1979-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table IIA1-4 provides the seasonally-adjusted annual rate of real GDP percentage change and contributions in percentage points in annual equivalent rate of gross domestic investment (GDI), real private fixed investment (PFI), nonresidential investment (NRES), business equipment and software (BES), residential investment (RES) and change in inventories (∆INV) for the cyclical expansions from IQ1983 to IVQ1985 and from IIIQ2009 to IVQ2012. GDI provided strong percentage points contributions to GDP growth in the critical first year of expansion in 1983 and also in several quarters in 1984 and 1985 while it has been muted in the cyclical expansion since IIIQ2009 with contributions largely only from IQ2010 to IVQ2011, deducting 0.08 percentage points in IVQ2012 most because of minus 1.27 percentage points of inventory accumulation while private fixed investment contributed 1.19 percentage points, nonresidential investment 0.83 percentage points, business equipment and software 0.86 percentage points and residential investment 0.36 percentage points. Much of the strong performance of GDI in the cyclical expansion after IQ1983 originated in contributions by real private fixed investment (PFI). Nonresidential investment also contributed strongly to growth in the expansion of the 1980s but has been muted in the current expansion. The contribution of business equipment and software collapsed to negative 0.19 percentage points in IIIQ2012 as business scales down investment but rebounded with 0.86 percentage points in IVQ2012. Residential investment (RES) was relatively strong in 1983 but was muted in following quarters and it only contributed significantly to growth of GDP in the four quarters of 2012.
Table IIA1-4, US, Contributions to the Rate of Growth of Real GDP in Percentage Points
| GDP | GDI | PFI | NRES | BES | RES | ∆INV | |
| 2012 | |||||||
| I | 2.0 | 0.78 | 1.18 | 0.74 | 0.39 | 0.43 | -0.39 |
| II | 1.3 | 0.09 | 0.56 | 0.36 | 0.35 | 0.19 | -0.46 |
| III | 3.1 | 0.85 | 0.12 | -0.19 | -0.19 | 0.31 | 0.73 |
| IV | -0.1 | -0.08 | 1.19 | 0.83 | 0.86 | 0.36 | -1.27 |
| 2011 | |||||||
| I | 0.1 | -0.68 | -0.14 | -0.11 | 0.72 | -0.03 | -0.54 |
| II | 2.5 | 1.40 | 1.39 | 1.30 | 0.53 | 0.09 | 0.01 |
| III | 1.3 | 0.68 | 1.75 | 1.71 | 1.20 | 0.03 | -1.07 |
| IV | 4.1 | 3.72 | 1.19 | 0.93 | 0.62 | 0.26 | 2.53 |
| 2010 | |||||||
| I | 2.3 | 2.13 | -0.10 | 0.20 | 0.90 | -0.30 | 2.23 |
| II | 2.2 | 1.65 | 1.58 | 1.07 | 0.76 | 0.51 | 0.07 |
| III | 2.6 | 1.87 | -0.10 | 0.70 | 0.76 | -0.80 | 1.97 |
| IV | 2.4 | -0.75 | 0.87 | 0.83 | 0.60 | 0.03 | -1.61 |
| 2009 | |||||||
| I | -5.3 | -7.02 | -4.73 | -3.54 | -2.16 | -1.18 | -2.29 |
| II | -0.3 | -3.52 | -2.49 | -1.86 | -0.54 | -0.63 | -1.03 |
| III | 1.4 | -0.14 | -0.32 | -0.73 | 0.25 | 0.40 | 0.19 |
| IV | 4.0 | 3.85 | -0.69 | -0.57 | 0.40 | -0.12 | 4.55 |
| 1982 | |||||||
| I | -6.4 | -7.50 | -2.04 | -1.25 | -0.47 | -0.79 | -5.47 |
| II | 2.2 | -0.05 | -2.40 | -1.98 | -1.19 | -0.42 | 2.35 |
| III | -1.5 | -0.72 | -1.87 | -1.82 | -0.57 | -0.04 | 1.15 |
| IV | 0.3 | -5.66 | -0.18 | -1.09 | -0.60 | 0.92 | -5.48 |
| 1983 | |||||||
| I | 5.1 | 2.20 | 1.26 | -1.02 | -0.18 | 2.28 | 0.94 |
| II | 9.3 | 5.87 | 2.36 | 0.52 | 1.40 | 1.84 | 3.51 |
| III | 8.1 | 4.30 | 3.70 | 2.02 | 1.62 | 1.68 | 0.60 |
| IV | 8.5 | 6.84 | 3.76 | 2.98 | 2.50 | 0.77 | 3.09 |
| 1984 | |||||||
| I | 8.0 | 7.15 | 2.08 | 1.55 | 0.57 | 0.52 | 5.07 |
| II | 7.1 | 2.44 | 2.74 | 2.39 | 1.50 | 0.35 | -0.30 |
| III | 3.9 | 1.67 | 1.45 | 1.62 | 1.05 | -0.17 | 0.21 |
| IV | 3.3 | -1.26 | 1.24 | 1.22 | 1.03 | 0.02 | -2.50 |
| 1985 | |||||||
| I | 3.8 | -2.38 | 0.57 | 0.62 | -0.16 | -0.06 | -2.94 |
| II | 3.4 | 1.24 | 0.88 | 0.74 | 0.75 | 0.14 | 0.35 |
| III | 6.4 | -0.68 | -0.53 | -0.75 | -0.37 | 0.23 | -0.16 |
| IV | 3.1 | 2.72 | 1.27 | 0.85 | 0.62 | 0.42 | 1.45 |
GDP: Gross Domestic Product; GDI: Gross Domestic Investment; PFI: Private Fixed Investment; NRES: Nonresidential; BES: Business Equipment and Software; RES: Residential; ∆INV: Change in Private Inventories.
GDI = PFI + ∆INV, may not add exactly because of errors of rounding.
GDP: seasonally-adjusted annual equivalent rate of growth in a quarter; components: percentage points at annual rate.
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
There are waves of changes in personal income and expenditures in Table IIB-1 that correspond somewhat to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html) because of the influence through price indexes. Data are distorted in Nov and Dec 2012 by the rush to realize income of all forms in anticipation of tax increases beginning in Jan 2013. In the first wave in Jan-Apr 2011 with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 8.4 percent, nominal disposable personal income (NDPI) at 5.8 percent and nominal personal consumption expenditures (NPCE) at 6.5 percent. Real disposable income (RDPI) increased at the annual equivalent rate of 1.5 percent and real personal consumption expenditures (RPCE) rose at annual equivalent 2.4 percent. In the second wave in May-Aug 2011 under risk aversion, NPI rose at annual equivalent 0.9 percent, NPDI at 1.2 percent and NPCE at 2.7 percent. RDPI contracted at 1.5 percent annual equivalent and RPCE crawled at 0.3 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec 2011, NPI rose at 1.5 percent annual equivalent, NDPI at 0.9 percent and NPCE at 2.7 percent. RDPI increased at 0.3 percent annual equivalent and RPCE at 1.8 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased at 8.7 percent annual equivalent and NDPI at 8.3 percent. Real disposable income (RDPI) is more dynamic in the revisions, growing at 4.5 percent annual equivalent and RPCE at 2.8 percent. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 6.6 percent and real consumption (RPCE) at 2.8 percent. In the fifth wave in Apr-Jul 2012, NPI increased at annual equivalent 1.5 percent, NDPI at 1.2 percent and RDPI at 1.8 percent. Financial repression failed to stimulate consumption with NPCE growing at 1.2 percent annual equivalent and RPCE at 1.2 percent. In the sixth wave in Aug-Oct 2012, in another wave of carry trades into commodity futures, NPI and NDPI increased at 2.4 percent annual equivalent while real disposable income (RDPI) declined at 1.2 percent annual equivalent. Data for Nov-Dec 2012 have illusory increases: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). In the seventh wave, anticipations of tax increases in Jan 2013 caused exceptional income gains that increased personal income to annual equivalent 23.8 percent in Nov-Dec 2012, nominal disposable income at 24.6 percent and real disposable personal income at 25.7 percent with likely effects on nominal personal consumption that increased at 3.7 percent and real personal consumption at 4.9 percent with subdued prices. The numbers in parentheses show that without the exceptional effects NDPI (nominal disposable personal income) increased at 6.2 percent and RDPI (real disposable personal income) at 8.7 percent. The US economy began to decelerate in mid 2010 and has not recovered the pace of growth in the early expansion phase. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Wed Jan 30, 2012, the first or advanced estimate of GDP for IVQ2012 at minus 0.1 percent seasonally-adjusted annual rate (SAAR) (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_adv.pdf). In the four quarters of 2012, the US economy is growing at the annual equivalent rate of 1.9 percent {([(1.021/4(1.013)1/4(1.0173)1/4(1.0254)1/4]-1)100 = 1.89%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding 1.28 percentage points of national defense expenditure reductions and 1.27 percentage points of inventory divestment to growth of minus 0.1 percent SAAR in IVQ2012 to obtain 2.54 percent. Surprisingly, the revised data for personal income and personal consumption are much stronger than earlier until the bump in Aug 2012. RDPI stagnated in Jan-Dec 2011 with the latest revised data compared with growth of 3.3 percent in Jan-Dec 2010 but grew at annual equivalent 4.5 percent in Jan-Mar 2012 and 1.8 percent in Apr-Jul 2012. The salient deceleration is the decline of the annual equivalent rate of NPCE (nominal personal consumption expenditures) to 1.2 percent annual equivalent in Apr-Jul 2012 and of RPCE (real personal consumption expenditures) to 1.2 percent. A bump occurred in Aug 2012 with increases of commodity prices by the carry trade from zero interest rates to exposures in commodity futures and other risk financial assets. Real disposable income fell 0.3 percent in Aug 2012 or at annual equivalent minus 3.5 percent. Nominal personal consumption expenditures increased 0.3 percent in Aug 2012 or at annual equivalent 3.7 percent but stagnated in real terms. Both nominal personal income and nominal disposable income increased 0.1 percent in Aug 2012 or at 1.2 percent in annual equivalent. Real disposable income (RDPI) fell 0.1 percent in Oct 2012 while real personal consumption expenditures (RPCE) contracted 0.2 percent. RDPI increased 1.3 percent in Nov 2012 and 2.8 percent in Dec 2012 because of realization of incomes in anticipation of tax increases in Jan 2013 while RPCE increased 0.6 percent in Nov 2012 and 0.2 percent in Dec 2012.
Table IIB-1, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %
| NPI | NDPI | RDPI | NPCE | RPCE | |
| 2012 | |||||
| ∆% Jan-Dec 2012*** | 6.0 | 7.0 | 5.6 | 3.6 | 2.2 |
| Dec | 2.6 | 2.7 (0.4)* | 2.8 (0.5)* | 0.2 | 0.2 |
| Nov | 1.0 | 1.0 (0.6)* | 1.3 (0.9)* | 0.4 | 0.6 |
| AE ∆% Nov-Dec | 23.8 | 24.6 (6.2)* | 27.5 (8.7)* | 3.7 | 4.9 |
| Oct | 0.1 | 0.1 | -0.1 | -0.1 | -0.2 |
| Sep | 0.4 | 0.4 | 0.1 | 0.8 | 0.5 |
| Aug | 0.1 | 0.1 | -0.3 | 0.3 | 0.0 |
| AE ∆% Aug-Oct | 2.4 | 2.4 | -1.2 | 4.1 | 1.2 |
| Jul | 0.1 | 0.1 | 0.1 | 0.4 | 0.3 |
| Jun | 0.3 | 0.2 | 0.2 | 0.0 | -0.1 |
| May | 0.1 | 0.1 | 0.3 | -0.2 | 0.0 |
| Apr | 0.0 | 0.0 | 0.0 | 0.2 | 0.2 |
| AE ∆% Apr-Jul | 1.5 | 1.2 | 1.8 | 1.2 | 1.2 |
| Mar | 0.5 | 0.5 | 0.2 | 0.3 | 0.0 |
| Feb | 0.7 | 0.6 | 0.3 | 0.8 | 0.4 |
| Jan | 0.9 | 0.9 | 0.6 | 0.5 | 0.3 |
| AE ∆% Jan-Mar | 8.7 | 8.3 | 4.5 | 6.6 | 2.8 |
| 2011 | |||||
| ∆% Jan-Dec 2011* | 3.6 | 2.5 | 0.0 | 4.2 | 1.7 |
| Dec | 0.3 | 0.3 | 0.2 | 0.1 | 0.0 |
| Nov | -0.2 | -0.3 | -0.3 | 0.1 | 0.0 |
| Oct | 0.3 | 0.3 | 0.3 | 0.2 | 0.2 |
| Sep | 0.1 | 0.0 | -0.1 | 0.5 | 0.4 |
| AE ∆% Sep-Dec | 1.5 | 0.9 | 0.3 | 2.7 | 1.8 |
| Aug | 0.0 | 0.0 | -0.3 | 0.2 | -0.1 |
| Jul | 0.1 | 0.2 | -0.1 | 0.7 | 0.5 |
| Jun | 0.2 | 0.2 | 0.1 | -0.1 | -0.2 |
| May | 0.0 | 0.0 | -0.2 | 0.1 | -0.1 |
| AE ∆% May-Aug | 0.9 | 1.2 | -1.5 | 2.7 | 0.3 |
| Apr | 0.3 | 0.3 | 0.0 | 0.4 | 0.0 |
| Mar | 0.1 | 0.1 | -0.3 | 0.7 | 0.3 |
| Feb | 0.4 | 0.4 | 0.0 | 0.6 | 0.3 |
| Jan | 1.9 | 1.1 | 0.8 | 0.4 | 0.2 |
| AE ∆% Jan-Apr | 8.4 | 5.8 | 1.5 | 6.5 | 2.4 |
| 2010 | |||||
| ∆% Jan-Dec 2010** | 5.3 | 4.9 | 3.3 | 4.4 | 2.8 |
| Dec | 0.7 | 0.7 | 0.4 | 0.4 | 0.2 |
| Nov | 0.2 | 0.2 | 0.1 | 0.5 | 0.4 |
| Oct | 0.4 | 0.3 | 0.1 | 0.7 | 0.4 |
| IVQ2010∆% | 1.3 | 1.2 | 0.6 | 1.6 | 1.0 |
| IVQ2010 AE ∆% | 5.3 | 4.9 | 2.4 | 6.6 | 4.1 |
Notes: *Excluding exceptional income gains in Nov and Dec 2012 because of anticipated tax increases in Jan 2013 ((page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent
Percentage change month to month seasonally adjusted
*∆% Dec 2011/Dec 2010 **∆% Dec 2010/Dec 2009 *** ∆% Dec 2012/Dec 2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Further information on income and consumption is provided by Table IIB-2. The 12-month rates of increase of RDPI and RPCE in 2011 show sharp trend of deterioration of RDPI from over 3 percent in the final four months of 2010 to less than 3 percent at the end of IQ2011 and then collapsing to a range of 0.9 to 0.0 percent in Jun-Dec 2011. Revisions shows decline of RDPI of 0.2 percent in the 12 months ending in Jan 2012 and marginal increase of 0.1 percent in the 12 months ending in Feb 2012. The significant difference is continuing growth of 12-month percentage changes of RDPI with 1.3 percent in Jun 2012, 1.5 percent in both Jul and Aug 2012 and 1.7 percent in Sep 2012 but 1.3 percent in Oct 2012 followed by 3.0 percent in Nov 2012 and 5.6 percent in Dec 2012. Increases of RDPI in Nov-Dec 2012 are explained by the BEA as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 1.6 percent in Mar 2012, 1.5 percent in Oct 2012, 2.0 percent in Nov 2012 and 2.2 percent in Dec 2012 perhaps also with some effects of anticipations of tax increases in Jan 2013. Subdued growth of RPCE could affect revenues of business. Growth rates of personal consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-month rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate. The 12-month rates of growth of RPCEGD have fallen from around 10 percent and even higher in several months from Sep 2010 to Feb 2011 to the range of 6.4 to 9.7 percent in Jan-Dec 2012. RPCEG growth rates have fallen from around 5 percent late in 2010 and early Jan-Feb 2011 to the range of 2.4 to 4.0 percent in Jan-Dec 2012. There are limits to sustained growth on the basis of financial repression in an environment of weak labor markets and real labor remuneration.
Table IIB-2, Real Disposable Personal Income and Real Personal Consumption Expenditures
Percentage Change from the Same Month a Year Earlier %
| RDPI | RPCE | RPCEG | RPCEGD | RPCES | |
| 2012 | |||||
| Dec | 5.6 | 2.2 | 4.0 | 9.7 | 1.3 |
| Nov | 3.0 | 2.0 | 3.4 | 9.1 | 1.3 |
| Oct | 1.3 | 1.5 | 2.4 | 6.4 | 1.0 |
| Sep | 1.7 | 1.9 | 3.7 | 8.9 | 1.1 |
| Aug | 1.5 | 1.9 | 3.7 | 8.9 | 0.9 |
| Jul | 1.5 | 1.9 | 3.1 | 7.3 | 1.2 |
| Jun | 1.3 | 2.0 | 3.5 | 8.6 | 1.3 |
| May | 1.3 | 1.9 | 3.0 | 7.4 | 1.4 |
| Apr | 0.7 | 1.8 | 2.4 | 6.5 | 1.5 |
| Mar | 0.7 | 1.6 | 2.6 | 6.6 | 1.1 |
| Feb | 0.1 | 1.9 | 2.7 | 7.4 | 1.5 |
| Jan | -0.2 | 1.8 | 2.6 | 6.8 | 1.4 |
| 2011 | |||||
| Dec | 0.0 | 1.7 | 2.5 | 6.0 | 1.3 |
| Nov | 0.3 | 1.9 | 2.6 | 5.8 | 1.5 |
| Oct | 0.7 | 2.3 | 3.2 | 5.9 | 1.8 |
| Sep | 0.5 | 2.4 | 3.4 | 7.0 | 2.0 |
| Aug | 0.4 | 2.1 | 2.6 | 5.3 | 1.9 |
| Jul | 0.9 | 2.8 | 4.1 | 6.4 | 2.1 |
| Jun | 0.9 | 2.4 | 3.4 | 5.3 | 1.9 |
| May | 1.0 | 2.6 | 3.9 | 6.5 | 2.0 |
| Apr | 1.8 | 3.0 | 4.7 | 8.2 | 2.1 |
| Mar | 2.6 | 3.0 | 4.2 | 7.8 | 2.4 |
| Feb | 3.4 | 3.1 | 5.5 | 11.3 | 1.9 |
| Jan | 3.5 | 3.1 | 5.5 | 11.0 | 1.9 |
| 2010 | |||||
| Dec | 3.3 | 2.8 | 4.7 | 9.0 | 1.9 |
| Nov | 3.5 | 3.2 | 5.1 | 8.8 | 2.2 |
| Oct | 3.7 | 2.7 | 5.3 | 10.8 | 1.5 |
| Sep | 3.2 | 2.5 | 4.7 | 9.1 | 1.5 |
Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services
Numbers are percentage changes from the same month a year earlier
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IIB-1 shows US real personal consumption expenditures (RPCE) between 1995 and 2012. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.
Chart IIB-1, US, Real Personal Consumption Expenditures, Quarterly Seasonally Adjusted at Annual Rates 1995-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Percent changes from the prior period in seasonally-adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart IIB-2 from 1995 to 2012. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart IIA-2 that the average rate of growth of RPCE was higher before the recession than during the past fourteen quarters of expansion that began in IIIQ2009.
Chart IIB-2, Percent Change from Prior Period in Real Personal Consumption Expenditure, Quarterly Seasonally Adjusted at Annual Rates 1995-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Personal income and its disposition are shown in Table IIB-3. The latest revisions have changed movements in two forms: (1) more dynamism in personal and disposable income that the Bureau of Economic Analysis explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf); (2) stronger trend of increase of the savings rate with decline into Aug and Sep, marginal increase in Oct 2012 and Nov 2012 and jump in Dec 2012 propelled by exceptional realizations of income in anticipation of tax increases in Jan 2012. Disposable personal income in current dollars or without adjusting for inflation increased from the annual rate of $11,609.1 billion in Dec 2011 to $12,422.4 billion in Dec 2012, by 7.0 percent and 5.6 percent adjusting for inflation (see Table IIB-2). Nominal wage and salary disbursements increased from the annual rate of $6687.6 billion in Dec 2011 to $$6994.2 billion in Dec 2012, by 4.6 percent. From Dec 2010 to Dec 2011, wage and salary disbursements increased 3.2 percent and disposable personal income 2.5 percent. Personal savings as percent of disposable personal income, or savings rate, fell from 4.9 percent in Dec 2010 to 3.4 percent in Dec 2011, climbing back to 4.1 percent in Jun 2012 but declined to 3.6 percent in Aug 2012 and 3.3 percent in Sep 2012, increasing marginally to 3.4 percent in Oct 2012, 4.1 percent in Nov 2012 and 6.5 percent in Dec 2012 probably propelled by realization of income in Nov-Dec 2012 in anticipation of higher tax rates in Jan 2013. Revised data suggest that economic weakness originates in increasing savings but fractured labor markets (Section I and earlier
http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html) and weak hiring (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html) are ignored in such interpretation.
Table IIB-3, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates $ Billions
| Personal | Wages & | Personal | DPI | Savings | |
| Dec 2012 | 13,936.1 | 6,994.2 | 1,513.7 | 12,422.4 | 6.5 |
| Nov 2012 | 13,583.7 | 6,949.2 | 1,492.6 | 12,091.1 | 4.1 |
| Change Dec/Nov | 352.4 ∆% 2.6 | 45.0 ∆% 0.6 | 21.1 ∆% 1.4 | 331.3 ∆% 2.7 | |
| Oct 2012 | 13,447.9 | 6,887.7 | 1,482.3 | 11,965.6 | 3.4 |
| Change Nov/Oct | 135.8 ∆% 1.0 | 61.5 ∆% 0.9 | 10.3 ∆% 0.7 | 125.5 ∆% 1.0 | |
| Sep 2012 | 13,439.3 | 6,902.6 | 1,480.0 | 11,959.3 | 3.3 |
| Change Oct/Sep | 8.6 ∆% 0.1 | -14.9 ∆% -0.2 | 2.3 ∆% 0.2 | 6.3 ∆% 0.1 | |
| Aug 2012 | 13,385.4 | 6,872.6 | 1,473.5 | 11,912.0 | 3.6 |
| Change Sep/Aug | 53.9 ∆% 0.4 | 30.0 ∆% 0.4 | 6.5 ∆% 0.4 | 47.3 ∆% 0.4 | |
| Jul 2012 | 13,374.4 | 6,869.8 | 1,472.2 | 11,902.2 | 3.9 |
| Change Aug/Jul | 11.0 ∆% 0.1 | 2.8 ∆% 0.0 | 1.3 ∆% 0.1 | 9.8 ∆% 0.1 | |
| Jun 2012 | 13,355.9 | 6,858.5 | 1,470.0 | 11,885.9 | 4.1 |
| Change Jul/Jun | 18.5 ∆% 0.1 | 11.3 ∆% 0.2 | 2.2 ∆% 0.1 | 16.3 ∆% 0.1 | |
| May 2012 | 13,322.3 | 6,840.3 | 1,464.1 | 11,858.2 | 3.9 |
| Change Jun/ May | 33.6 ∆% 0.3 | 18.2 ∆% 0.3 | 5.9 ∆% 0.4 | 27.7 ∆% 0.2 | |
| Apr 2012 | 13,302.9 | 6,848.9 | 1,461.6 | 11,841.3 | 3.5 |
| Change May/ Apr | 19.4 ∆% 0.1 | -8.6 ∆% -0.1 | 2.5 ∆% 0.2 | 16.9 ∆% 0.1 | |
| Mar | 13,298.3 | 6,869.4 | 1,460.6 | 11,837.7 | 3.7 |
| Change Apr/ Mar | 4.6 ∆% 0.0 | -20.5 ∆% -0.3 | 1.0 ∆% 0.1 | 3.6 ∆% 0.0 | |
| Feb 2012 | 13,234.7 | 6,831.5 | 1,452.0 | 11,782.7 | 3.5 |
| Change Mar/ Feb | 63.6 ∆% 0.5 | 37.9 ∆% 0.6 | 8.6 ∆% 0.6 | 55.0 ∆% 0.5 | |
| Jan | 13,148.4 | 6,776.7 | 1,439.6 | 11,708.8 | 3.7 |
| Change Feb/Jan | 86.3 ∆% 0.7 | 54.8 ∆% 0.8 | 12.4 ∆% 0.9 | 73.9 ∆% 0.6 | |
| Dec 2011 | 13,032.2 | 6,687.6 | 1,423.1 | 11,609.1 | 3.4 |
| Change Jan/Dec | 116.2 ∆% 0.9 | 89.1 ∆% 1.3 | 16.5 | 99.7 | |
| Dec 2010 | 12,574.1 | 6,482.8 | 1,243.5 | 11,330.6 | 4.9 |
| Change Dec 2011/ Dec 2010 | 458.1 ∆% 3.6 | 204.8 ∆% 3.2 | 179.6 ∆% 14.4 | 278.5 ∆% 2.5 |
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIB-3 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s. Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982 (http://www.nber.org/cycles.html) with combined drop of GDP by 4.8 percent.
Chart IIB-4, US, Personal Income, Billion Dollars, Quarterly Seasonally Adjusted at Annual Rates, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
A different evolution of personal income is shown in Chart IIB-4. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income during the expansion has been tepid even with the new revisions. In IVQ2012, personal income grew at the seasonally adjusted annual rate (SAAR) of 7.9 percent and disposable personal income at 8.1 percent, which are explained by the BEA as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf).
Chart IIB-4, US, Personal Income, Current Billions of Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Real or inflation-adjusted disposable personal income is provided in Chart IIB-5 from 1980 to 1989. Real disposable income after allowing for taxes and inflation grew steadily at high rates during the entire decade.
Chart IIB-5, US, Real Disposable Income, Billions of Chained 2005 Dollars, Quarterly Seasonally Adjusted at Annual Rates 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Much weaker performance of real disposable income is evident in Chart IIB-6. There was initial recovery in 2010 and then income after inflation and taxes stagnated into 2011. There is more dynamism with the new revisions for the first half of 2012. In IVQ2012, real disposable income grew at the SAAR of 6.8 percent and real personal income at 7.8 percent, which the BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf).
Chart IIB-6, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates, 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIB-7 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 1980 to 1989. Rates of change were high during the decade with few negative changes.
Chart IIB-7, US, Real Disposable Income Percentage Change from Preceding Period at Quarterly Seasonally-Adjusted Annual Rates, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIB-8 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 2007 to 2012. There has been a period of positive rates followed by decline of rates and then negative and low rates in 2011. Recovery in 2012 has not reproduced the dynamism of the brief early phase of expansion. In IVQ2012, real disposable income grew at the SAAR of 6.8 percent and real personal income at 7.8 percent, which the BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf).
Chart, IIB-8, US, Real Disposable Income, Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In the latest available report, the Bureau of Economic Analysis (BEA) estimates US personal income in 2012 at the seasonally adjusted annual rate of $13,936.1 billion, as shown in Table IIB-3 above (see Table 1 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The major portion of personal income is compensation of employees of $8,702.4 billion, or 62.5 percent of the total. Wage and salary disbursements are $6,994.2 billion, of which $5,790.2 billion by private industries and supplements to wages and salaries of $1,708.3 billion (employer contributions to pension and insurance funds are $1,188.1 billion and contributions to social insurance are $520.2 billion). In Dec 1985, US personal income was $3,596.4 billion at SAAR (http://www.bea.gov/iTable/index_nipa.cfm). Compensation of employees was $2,498.5 billion, or 69.5 percent of the total. Wage and salary disbursement were $2.056.3 billion of which $1671.0 billion by private industries. Supplements to wages and salaries were $442.2 billion with employer contributions to pension and insurance funds of $289.4 billion and $152.9 billion to government social insurance. Chart IIB-9 provides US wage and salary disbursement by private industries in the 1980s. Growth was robust after the interruption of the recessions.
Chart IIB-9, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates Billions of Dollars, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIB-10 shows US wage and salary disbursement of private industries from 2007 to 2012. There is a drop during the contraction followed by initial recovery in 2010 and then the current much weaker relative performance in 2011 and 2012.
Chart IIB-10, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIB-11 provides finer detail with monthly wage and salary disbursement of private industries from 2007 to 2012. There is decline during the contraction and a period of mild recovery followed by stagnation and recent recovery that is weaker than in earlier expansion periods of the business cycle.
Chart IIB-11, US, Wage and Salary Disbursement, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIB-12 provides monthly real disposable personal income per capita from 1980 to 1989. This is the ultimate measure of well being in receiving income by obtaining the value per inhabitant. The measure cannot adjust for the distribution of income. Real disposable personal income per capita grew rapidly during the expansion after 1983 and continued growing during the rest of the decade.
Chart IIB-12, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIB-13 provides monthly real disposable personal per capita income from 2007 to 2012. There was initial recovery from the drop during the global recession followed by stagnation. Real per capita disposable income increased 1.2 percent from $32,611 in chained dollars of 2005 in Oct 2012 to $33,004 in Nov 2012 and 2.7 percent to $33,904 in Dec 2012 for cumulative increase of 4.0 percent from Oct 2012 to Dec 2012 (data at http://www.bea.gov/iTable/index_nipa.cfm). This increase is shown in a jump in the final segment in Chart IIB-13 with Nov-Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf).
Chart IIB-13, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
IIC Financial Repression. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6). Interest rate ceilings on deposits and loans have been commonly used. Prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits were imposed by the Banking Act of 1933. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.
Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 1.7 percent in the 12 months ending in Dec 2012 (http://www.bls.gov/cpi/) but rising during waves of carry trades from zero interest rates to commodity futures exposures (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html). Funding problems motivated compensatory measures by banks. Money-center banks developed the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:
“Large negotiable CD’s were particularly hard hit by the interest rate ceiling because they are deposits of financially sophisticated individuals and institutions who have many alternatives. As already noted, they declined from a peak of $24 billion in mid-December, 1968, to less than $12 billion in early October, 1969.”
Banks created different liabilities to compensate for the decline in CDs. As Friedman (1970, 25; 1969) explains:
“The most important single replacement was almost surely ‘liabilities of US banks to foreign branches.’ Prevented from paying a market interest rate on liabilities of home offices in the United States (except to foreign official institutions that are exempt from Regulation Q), the major US banks discovered that they could do so by using the Euro-dollar market. Their European branches could accept time deposits, either on book account or as negotiable CD’s at whatever rate was required to attract them and match them on the asset side of their balance sheet with ‘due from head office.’ The head office could substitute the liability ‘due to foreign branches’ for the liability ‘due on CDs.”
Friedman (1970, 26-7) predicted the future:
“The banks have been forced into costly structural readjustments, the European banking system has been given an unnecessary competitive advantage, and London has been artificially strengthened as a financial center at the expense of New York.”
In short, Depression regulation exported the US financial system to London and offshore centers. What is vividly relevant currently from this experience is the argument by Friedman (1970, 27) that the controls affected the most people with lower incomes and wealth who were forced into accepting controlled-rates on their savings that were lower than those that would be obtained under freer markets. As Friedman (1970, 27) argues:
“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.”
Chart IIB-14 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2012. There was a long-term downward sloping trend from 12 percent in the early 1980s to less than 2 percent in 2005-2006. The savings rate then rose during the contraction and also in the expansion. In 2011 and into 2012 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The savings rate increased in the final segment of Chart IIB-14 in 2012 followed by another decline because of the pain of the opportunity cost of zero remuneration for hard-earned savings. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2012 caused the jump of the savings rate to 6.5 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings and misallocating resources away from their best uses. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments.
Chart IIB-14, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-15 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to Oct 2012. The uncertainties caused by the global recession resulted in sharp increase in the savings ratio that peaked at 8.3 percent in May 2008 (http://www.bea.gov/iTable/index_nipa.cfm). The second highest ratio occurred at 6.7 percent in May 2009. There was another rising trend until 5.8 percent in Jun 2010 and then steady downward trend until trough of 3.2 percent in Nov 2011, which was followed by an upward trend with 4.1 percent in Jun 2012 but decline to 3.6 percent in Aug 2012, 3.3 percent in Sep 2012, 3.4 percent in Oct and increase to 4.1 percent in Nov 2012 and jump to 6.5 percent in Dec 2012. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2012 caused the jump of the savings rate to 6.5 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). Permanent manipulation of the entire spectrum of interest rates with monetary policy measures distorts the compass of resource allocation with inferior outcomes of future growth, employment and prosperity and dubious redistribution of income and wealth worsening the most the personal welfare of people without vast capital and financial relations to manage their savings.
Chart IIB-15, US, Personal Savings as a Percentage of Disposable Income, Monthly 2007-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
III World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) slowing growth in China with political development and slowing growth in Japan and world trade; (3) slow growth propelled by savings/investment reduction in the US with high unemployment/underemployment, falling wages, hiring collapse, contraction of real private fixed investment, decline of wealth of households over the business cycle by 10.9 percent adjusted for inflation while growing 617.2 percent adjusted for inflation from IVQ1945 to IIIQ2012 and unsustainable fiscal deficit/debt threatening prosperity that can cause risk premium on Treasury debt with Himalayan interest rate hikes; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk financial assets during the week. There are various appendixes for convenience of reference of material related to the euro area debt crisis. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention and is available in the Appendixes section at the end of the blog comment. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011 and is available in the Appendixes section at the end of the blog comment. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank and is available in the Appendixes section at the end of the blog comment. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union and is available following Subsection IIIA. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis and is available following Subsection IIIA. Subsection IIIG Appendix on Deficit Financing of Growth and the Debt Crisis provides analysis of proposals to finance growth with budget deficits together with experience of the economic history of Brazil and is available in the Appendixes section at the end of the blog comment.
IIIA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table III-1, updated with every comment in this blog, provides beginning values on Fr Jan 25 and daily values throughout the week ending on Feb 1 2013 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Jan 25 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Jan 25, 2012”, first row “USD/EUR 1.3459 -1.0%,” provides the information that the US dollar (USD) depreciated 1.0 percent to USD 1.3459/EUR in the week ending on Fri Jan 25 relative to the exchange rate on Fri Jan 18. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf) and another agreement on Jun 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).
The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3459/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Jan 25, depreciating to USD 1.3492/EUR on Tue Jan 29, 2013, or by 0.2 percent. The dollar depreciated because more dollars, $1.3492, were required on Tue Jan 29 to buy one euro than $1.3459 on Jan 25. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate such as in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3459/EUR on Jan 25; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Jan 25, to the last business day of the current week, in this case Fri Feb 1, such as depreciation by 1.4 percent to USD 1.3642/EUR by Feb 1; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD depreciated (denoted by negative sign) by 1.4 percent from the rate of USD 1.3459/EUR on Fri Jan 25 to the rate of USD 1.3642/EUR on Fri Feb 1 {[(1.3642/1.3459) – 1]100 = 1.4%} and depreciated (denoted by negative sign) by 0.5 percent from the rate of USD 1.3578 on Thu Jan 24 to USD 1.3642/EUR on Fri Feb 1 {[(1.3642/1.3578) -1]100 = 0.5%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets, depreciating the dollar.
Table III-I, Weekly Financial Risk Assets Jan 28 to Feb 1, 2013
| Fri Jan 25, 2013 | M 28 | Tue 29 | W 30 | Thu 31 | Fr 1 |
| USD/EUR 1.3459 -1.0% | 1.3455 0.0% 0.0% | 1.3492 -0.2% -0.3% | 1.3567 -0.8% -0.6% | 1.3578 -0.9% -0.1% | 1.3642 -1.4% -0.5% |
| JPY/ USD 90.87 -0.9% | 90.85 0.0% 0.0% | 90.73 0.2% 0.1% | 91.09 -0.2% -0.4% | 91.72 -0.9% -0.7% | 92.84 -2.2% -1.2% |
| CHF/ USD 0.9266 0.8% | 0.9263 0.0% 0.0% | 0.9213 0.6% 0.5% | 0.9108 1.7% 1.1% | 0.9102 1.8% 0.1% | 0.9080 2.0% 0.2% |
| CHF/ EUR 1.2470 -0.2% | 1.2463 0.1% 0.1% | 1.2431 0.3% 0.3% | 1.2357 0.9% 0.6% | 1.2361 0.9% 0.0% | 1.2389 0.6% -0.2% |
| USD/ AUD 1.0425 0.9592 -0.8% | 1.0417 0.9600 -0.1% -0.1% | 1.0474 0.9547 0.5% 0.6% | 1.0417 0.9600 -0.1% -0.6% | 1.0426 0.9591 0.0% 0.1% | 1.0407 0.9609 -0.2% -0.2% |
| 10 Year T Note 1.947 | 1.97 | 1.995 | 1.99 | 1.984 | 2.024 |
| 2 Year T Note 0.278 | 0.278 | 0.283 | 0.268 | 0.264 | 0.26 |
| German Bond 2Y 0.26 10Y 1.64 | 2Y 0.30 10Y 1.69 | 2Y 0.27 10Y 1.69 | 2Y 0.29 10Y 1.71 | 2Y 0.27 10Y 1.68 | 2Y 0.25 10Y 1.67 |
| DJIA 13895.98 1.8% | 13881.93 -0.1% -0.1% | 13954.42 0.4% 0.5% | 13910.42 0.1% -0.3% | 13860.58 -0.3% -0.4% | 14009.79 0.8% 1.1% |
| DJ Global 2115.30 1.3% | 2113.95 -0.1% -0.1% | 2122.55 0.3% 0.4% | 2119.27 0.2% -0.2% | 2112.76 -0.1% -0.3% | 2127.53 0.6% 0.7% |
| DJ Asia Pacific 1341.29 -0.7% | 1338.70 -0.2% -0.3% | 1349.89 0.6% 0.8% | 1357.35 1.2% 0.6% | 1356.84 1.2% 0.0% | 1351.65 0.8% -0.4% |
| Nikkei 10926.65 0.1% | 10824.31 -0.9% -0.9% | 10866.72 -0.5% 0.4% | 11113.95 1.7% 2.3% | 11138.66 1.9% 0.2% | 11191.34 2.4% 0.5% |
| Shanghai 2291.30 -1.1% | 2346.51 2.4% 2.4% | 2358.98 2.9% 0.5% | 2382.47 4.0% 1.0% | 2385.42 4.1% 0.1% | 2419.02 5.6% 1.4% |
| DAX 7857.97 2.0% | 7833.00 -0.3% -0.3% | 7848.57 -0.1% 0.2% | 7811.31 -0.6% -0.5% | 7776.05 -1.0% -0.5% | 7833.39 -0.3% 0.7% |
| DJ UBS Comm. 140.65 -0.6% | 140.53 -0.1% -0.1% | 140.98 0.2% 0.3% | 142.96 1.6% 1.4% | 142.40 1.2% -0.4% | 142.89 1.6% 0.3% |
| WTI $ B 95.88 0.6% | 96.53 0.7% 0.7% | 97.35 1.5% 0.8% | 98.04 2.3% 0.7% | 97.45 1.6% -0.6% | 97.58 1.8% 0.1% |
| Brent $/B 113.28 1.3% | 113.48 0.2% 0.2% | 114.15 0.8% 0.6% | 115.04 1.6% 0.8% | 115.59 2.0% 0.5% | 116.53 2.9% 0.8% |
| Gold $/OZ 1656.60 -1.7% | 1656.0 0.0% 0.0% | 1664.7 0.5% 0.5% | 1677.8 1.3% 0.8% | 1664.4 0.5% -0.8% | 1668.2 0.7% 0.2% |
Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss
Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce
Sources: http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
III World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) slowing growth in China with political development and slowing growth in Japan and world trade; (3) slow growth propelled by savings/investment reduction in the US with high unemployment/underemployment, falling wages, hiring collapse, contraction of real private fixed investment, decline of wealth of households over the business cycle by 10.9 percent adjusted for inflation while growing 617.2 percent adjusted for inflation from IVQ1945 to IIIQ2012 and unsustainable fiscal deficit/debt threatening prosperity that can cause risk premium on Treasury debt with Himalayan interest rate hikes; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk financial assets during the week. There are various appendixes for convenience of reference of material related to the euro area debt crisis. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention and is available in the Appendixes section at the end of the blog comment. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011 and is available in the Appendixes section at the end of the blog comment. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank and is available in the Appendixes section at the end of the blog comment. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union and is available following Subsection IIIA. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis and is available following Subsection IIIA. Subsection IIIG Appendix on Deficit Financing of Growth and the Debt Crisis provides analysis of proposals to finance growth with budget deficits together with experience of the economic history of Brazil and is available in the Appendixes section at the end of the blog comment.
IIIA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table III-1, updated with every comment in this blog, provides beginning values on Fr Jan 25 and daily values throughout the week ending on Feb 1 2013 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Jan 25 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Jan 25, 2012”, first row “USD/EUR 1.3459 -1.0%,” provides the information that the US dollar (USD) depreciated 1.0 percent to USD 1.3459/EUR in the week ending on Fri Jan 25 relative to the exchange rate on Fri Jan 18. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf) and another agreement on Jun 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).
The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3459/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Jan 25, depreciating to USD 1.3492/EUR on Tue Jan 29, 2013, or by 0.2 percent. The dollar depreciated because more dollars, $1.3492, were required on Tue Jan 29 to buy one euro than $1.3459 on Jan 25. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate such as in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3459/EUR on Jan 25; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Jan 25, to the last business day of the current week, in this case Fri Feb 1, such as depreciation by 1.4 percent to USD 1.3642/EUR by Feb 1; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD depreciated (denoted by negative sign) by 1.4 percent from the rate of USD 1.3459/EUR on Fri Jan 25 to the rate of USD 1.3642/EUR on Fri Feb 1 {[(1.3642/1.3459) – 1]100 = 1.4%} and depreciated (denoted by negative sign) by 0.5 percent from the rate of USD 1.3578 on Thu Jan 24 to USD 1.3642/EUR on Fri Feb 1 {[(1.3642/1.3578) -1]100 = 0.5%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets, depreciating the dollar.
Discussion of current and recent risk-determining events is followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States. A competing event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html). The DJIA closed at 14009.79 on Fri Feb 1, which is the first valuation above 14,000 since Oct 2007 when the DJIA reached historical highs. The DJIA closed at 14009.79 only 1.1 percent from the value of 14,157.38 reached on Oct 15, 2007.
Matt Jarzemsky, writing on “S&P 500 closes above 1500,” on Jan 25, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323539804578263331715973390.html?mod=WSJ_hp_LEFTWhatsNewsCollection), finds that the DJIA closed on Fri Jun 25, 2013 at 13,895.98, or 1.9 percent below its record high of 14,164.53 in Oct 2007 while S&P 500 closed at 1502.96. DJIA closed at 13,984.80 on Oct 15, 2007, or only 0.6 percent higher than 13,895.98 at the close of markets on Jan 25, 2013, reaching a high of 14,157.38 on Oct 15, 2007, which is only 1.9 percent higher than 13,895.98 at the close on Jan 25, 2013 (using interactive chart data at http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The S&P 500 closed at 1502.96 on Jan 25, 2013, which is only 3.0 percent from the close at 1458.71 on Oct 15, 2007, and 4.1 percent from the high at 1564.74 on Oct 15, 2007 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Rita Nazareth and Sarah Pringle, writing on “Dow Average rises to 5-year high amid debt-ceiling talks,” on Jan 18, 2012, published in Bloomberg (http://www.bloomberg.com/news/2013-01-18/u-s-stock-futures-little-changed-before-earnings-data.html), find that the DJIA reached on Jan 18, 2012, the highest level in five years at 13,649.70 with volume of 6.6 billion shares in US exchanges, which is higher by 6.9 percent than the average in three months. Vito J. Bacanelli, writing on “GOP proposal lifts Dow to five-year high,” on Jan 19, 2013, published by Barron’s (http://online.barrons.com/article/SB50001424052748703596604578235762819811322.html?mod=BOL_hpp_mag#articleTabs_article%3D1), finds that the closing level of 13,649.70 on Jan 18, 2013, is the highest close since Dec 10, 2007, only 4 percent lower than the all-time high and the best start for a year since 1997. The Wall Street Journal finds a 52-week high of 13661.87 on Oct 5, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The S&P 500 at 1485.98 is 5 percent below its all time high of 1565 in 2007. An important risk event is the reduction of growth prospects in the euro zone discussed by European Central Bank President Mario Draghi in “Introductory statement to the press conference,” on Dec 6, 2012 (http://www.ecb.int/press/pressconf/2012/html/is121206.en.html):
“This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.
The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.”
Reuters, writing on “Bundesbank cuts German growth forecast,” on Dec 7, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/8e845114-4045-11e2-8f90-00144feabdc0.html#axzz2EMQxzs3u), informs that the central bank of Germany, Deutsche Bundesbank reduced its forecast of growth for the economy of Germany to 0.7 percent in 2012 from an earlier forecast of 1.0 percent in Jun and to 0.4 percent in 2012 from an earlier forecast of 1.6 percent while the forecast for 2014 is at 1.9 percent.
The major risk event during earlier weeks was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 and 5.366 percent for the ten-year of Spain and 4.527 percent for the ten-year of Italy on Fri Nov 14, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Vanessa Mock and Frances Robinson, writing on “EU approves Spanish bank’s restructuring plans,” on Nov 28, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578146520774638316.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the European Union regulators approved restructuring of four Spanish banks (Bankia, NCG Banco, Catalunya Banc and Banco de Valencia), which helped to calm sovereign debt markets. Harriet Torry and James Angelo, writing on “Germany approves Greek aid,” on Nov 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578150532603095790.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the German parliament approved the plan to provide Greece a tranche of €44 billion in promised financial support, which is subject to sustainability analysis of the bond repurchase program later in Dec 2012. A hurdle for sustainability of repurchasing debt is that Greece’s sovereign bonds have appreciated significantly from around 24 percent for the bond maturing in 21 years and 20 percent for the bond maturing in 31 years in Aug 2012 to around 17 percent for the 21-year maturity and 15 percent for the 31-year maturing in Nov 2012. Declining years are equivalent to increasing prices, making the repurchase more expensive. Debt repurchase is intended to reduce bonds in circulation, turning Greek debt more manageable. Ben McLannahan, writing on “Japan unveils $11bn stimulus package,” on Nov 30, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/adc0569a-3aa5-11e2-baac-00144feabdc0.html#axzz2DibFFquN
), informs that the cabinet in Japan approved another stimulus program of $11 billion, which is twice larger than another stimulus plan in late Oct and close to elections in Dec. Henry Sender, writing on “Tokyo faces weak yen and high bond yields,” published on Nov 29, 2012 in the Financial Times (http://www.ft.com/intl/cms/s/0/9a7178d0-393d-11e2-afa8-00144feabdc0.html#axzz2DibFFquN), analyzes concerns of regulators on duration of bond holdings in an environment of likelihood of increasing yields and yen depreciation.
First, Risk-Determining Events. The European Council statement on Nov 23, 2012 asked the President of the European Commission “to continue the work and pursue consultations in the coming weeks to find a consensus among the 27 over the Union’s Multiannual Financial Framework for the period 2014-2020” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf) Discussions will continue in the effort to reach agreement on a budget: “A European budget is important for the cohesion of the Union and for jobs and growth in all our countries” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf). There is disagreement between the group of countries requiring financial assistance and those providing bailout funds. Gabrielle Steinhauser and Costas Paris, writing on “Greek bond rally puts buyback in doubt,” on Nov 23, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324352004578136362599130992.html?mg=reno64-wsj) find a new hurdle in rising prices of Greek sovereign debt that may make more difficult buybacks of debt held by investors. European finance ministers continue their efforts to reach an agreement for Greece that meets with approval of the European Central Bank and the IMF. The European Council (2012Oct19 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/133004.pdf ) reached conclusions on strengthening the euro area and providing unified financial supervision:
“The European Council called for work to proceed on the proposals on the Single Supervisory Mechanism as a matter of priority with the objective of agreeing on the legislative framework by 1st January 2013 and agreed on a number of orientations to that end. It also took note of issues relating to the integrated budgetary and economic policy frameworks and democratic legitimacy and accountability which should be further explored. It agreed that the process towards deeper economic and monetary union should build on the EU's institutional and legal framework and be characterised by openness and transparency towards non-euro area Member States and respect for the integrity of the Single Market. It looked forward to a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based.”
Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. The Bank of Spain released new data on doubtful debtors in Spain’s credit institutions (http://www.bde.es/bde/en/secciones/prensa/Agenda/Datos_de_credit_a6cd708c59cf931.html). In 2006, the value of doubtful credits reached €10,859 million or 0.7 percent of total credit of €1,508,626 million. In Aug 2012, doubtful credit reached €178,579 million or 10.5 percent of total credit of €1,698,714 million.
There are three critical factors influencing world financial markets. (1) Spain could request formal bailout from the European Stability Mechanism (ESM) that may also affect Italy’s international borrowing. David Roman and Jonathan House, writing on “Spain risks backlash with budget plan,” on Sep 27, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443916104578021692765950384.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze Spain’s proposal of reducing government expenditures by €13 billion, or around $16.7 billion, increasing taxes in 2013, establishing limits on early retirement and cutting the deficit by €65 billion through 2014. Banco de España, Bank of Spain, contracted consulting company Oliver Wyman to conduct rigorous stress tests of the resilience of its banking system. (Stress tests and their use are analyzed by Pelaez and Pelaez Globalization and the State Vol. I (2008b), 95-100, International Financial Architecture (2005) 112-6, 123-4, 130-3).) The results are available from Banco de España (http://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/ http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). The assumptions of the adverse scenario used by Oliver Wyman are quite tough for the three-year period from 2012 to 2014: “6.5 percent cumulative decline of GDP, unemployment rising to 27.2 percent and further declines of 25 percent of house prices and 60 percent of land prices (http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). Fourteen banks were stress tested with capital needs estimates of seven banks totaling €59.3 billion. The three largest banks of Spain, Banco Santander (http://www.santander.com/csgs/Satellite/CFWCSancomQP01/es_ES/Corporativo.html), BBVA (http://www.bbva.com/TLBB/tlbb/jsp/ing/home/index.jsp) and Caixabank (http://www.caixabank.com/index_en.html), with 43 percent of exposure under analysis, have excess capital of €37 billion in the adverse scenario in contradiction with theories that large, international banks are necessarily riskier. Jonathan House, writing on “Spain expects wider deficit on bank aid,” on Sep 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444138104578028484168511130.html?mod=WSJPRO_hpp_LEFTTopStories), analyzes the 2013 budget plan of Spain that will increase the deficit of 7.4 percent of GDP in 2012, which is above the target of 6.3 percent under commitment with the European Union. The ratio of debt to GDP will increase to 85.3 percent in 2012 and 90.5 percent in 2013 while the 27 members of the European Union have an average debt/GDP ratio of 83 percent at the end of IIQ2012. (2) Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even after the economy grows again at or close to potential output. Monetary easing by unconventional measures is now apparently open ended in perpetuity as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is the concern of the production and employment costs of controlling future inflation.
(2) The European Central Bank (ECB) approved a new program of bond purchases under the name “Outright Monetary Transactions” (OMT). The ECB will purchase sovereign bonds of euro zone member countries that have a program of conditionality under the European Financial Stability Facility (EFSF) that is converting into the European Stability Mechanism (ESM). These programs provide enhancing the solvency of member countries in a transition period of structural reforms and fiscal adjustment. The purchase of bonds by the ECB would maintain debt costs of sovereigns at sufficiently low levels to permit adjustment under the EFSF/ESM programs. Purchases of bonds are not limited quantitatively with discretion by the ECB as to how much is necessary to support countries with adjustment programs. Another feature of the OMT of the ECB is sterilization of bond purchases: funds injected to pay for the bonds would be withdrawn or sterilized by ECB transactions. The statement by the European Central Bank on the program of OTM is as follows (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html):
“6 September 2012 - Technical features of Outright Monetary Transactions
As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:
Conditionality
A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.
Coverage
Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.
Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.
No ex ante quantitative limits are set on the size of Outright Monetary Transactions.
Creditor treatment
The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.
Sterilisation
The liquidity created through Outright Monetary Transactions will be fully sterilised.
Transparency
Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.
Securities Markets Programme
Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.”
Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):
“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.
Mario Draghi (2012Aug29), President of the European Central Bank, also reiterated the need of exceptional and unconventional central bank policies (http://www.ecb.int/press/key/date/2012/html/sp120829.en.html):
“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.
The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”
Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Table III-7 in IIIE Appendix Euro Zone Survival Risk below provides the combined GDP in 2012 of the highly indebted euro zone members estimated in the latest World Economic Outlook of the IMF at $4167 billion or 33.1 percent of total euro zone GDP of $12,586 billion. Using the WEO of the IMF, Table III-8 in IIIE Appendix Euro Zone Survival Risk below provides debt of the highly indebted euro zone members at $3927.8 billion in 2012 that increases to $5809.9 billion when adding Germany’s debt, corresponding to 167.0 percent of Germany’s GDP. There are additional sources of debt in bailing out banks. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html).
Second, Risk-Measuring Yields and Exchange Rate. The ten-year government bond of Spain was quoted at 6.868 percent on Aug 10, 2012, declining to 6.447 percent on Aug 17 and 6.403 percent on Aug 24, 2012, and the ten-year government bond of Italy fell from 5.894 percent on Aug 10, 2012 to 5.709 percent on Aug 17 and 5.618 percent on Aug 24, 2012. The yield of the ten-year sovereign bond of Spain traded at 5.423 percent on Feb 4, 2012 and that of the ten-year sovereign bond of Italy at 4.415 percent. (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Diminishing aversion is captured by increase of the yield of the two- and ten-year Treasury notes and the two- and ten-year government bonds of Germany. Table III-1A provides yields of US and German governments bonds and the rate of USD/EUR. Yields of US and German government bonds decline during shocks of risk aversion and the dollar strengthens in the form of fewer dollars required to buy one euro. The yield of the US ten-year Treasury note fell from 2.202 percent on Aug 26, 2011 to 1.459 percent on Jul 20, 2012, reminiscent of experience during the Treasury-Fed accord of the 1940s that placed a ceiling on long-term Treasury debt (Hetzel and Leach 2001), while the yield of the ten-year government bond of Germany fell from 2.16 percent to 1.17 percent. In the week of Feb 1, 2013, the yield of the two-year Treasury decreased to 0.26 percent and that of the ten-year Treasury increased to 2.024 percent while the two-year bond of Germany fell to 0.25 percent and the ten-year increased to 1.67; and the dollar depreciated to USD 1.3642/EUR. The zero interest rates for the monetary policy rate of the US, or fed funds rate, carry trades ensure devaluation of the dollar if there is no risk aversion but the dollar appreciates in flight to safe haven during episodes of risk aversion. Unconventional monetary policy induces significant global financial instability, excessive risks and low liquidity. The ten-year Treasury yield is about equal to consumer price inflation of 1.7 percent in the 12 months ending in Dec 2012 (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html) and the expectation of higher inflation if risk aversion diminishes. Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury. The lower part of Table III-1A provides the same flight to government securities of the US and Germany and the USD during the financial crisis and global recession and the beginning of the European debt crisis in the spring of 2010 with the USD trading at USD 1.192/EUR on Jun 7, 2010.
Table III-1A, Two- and Ten-Year Yields of Government Bonds of the US and Germany and US Dollar/EUR Exchange rate
| US 2Y | US 10Y | DE 2Y | DE 10Y | USD/ EUR | |
| 2/1/13 | 0.26 | 2.024 | 0.25 | 1.67 | 1.3642 |
| 1/25/13 | 0.278 | 1.947 | 0.26 | 1.64 | 1.3459 |
| 1/18/13 | 0.252 | 1.84 | 0.18 | 1.56 | 1.3321 |
| 1/11/13 | 0.247 | 1.862 | 0.13 | 1.58 | 1.3343 |
| 1/4/13 | 0.262 | 1.898 | 0.08 | 1.54 | 1.3069 |
| 12/28/12 | 0.252 | 1.699 | -0.01 | 1.31 | 1.3218 |
| 12/21/12 | 0.272 | 1.77 | -0.01 | 1.38 | 1.3189 |
| 12/14/12 | 0.232 | 1.704 | -0.04 | 1.35 | 1.3162 |
| 12/7/12 | 0.256 | 1.625 | -0.08 | 1.30 | 1.2926 |
| 11/30/12 | 0.248 | 1.612 | 0.01 | 1.39 | 1.2987 |
| 11/23/12 | 0.273 | 1.691 | 0.00 | 1.44 | 1.2975 |
| 11/16/12 | 0.24 | 1.584 | -0.03 | 1.33 | 1.2743 |
| 11/9/12 | 0.256 | 1.614 | -0.03 | 1.35 | 1.2711 |
| 11/2/12 | 0.274 | 1.715 | 0.01 | 1.45 | 1.2838 |
| 10/26/12 | 0.299 | 1.748 | 0.05 | 1.54 | 1.2942 |
| 10/19/12 | 0.296 | 1.766 | 0.11 | 1.59 | 1.3023 |
| 10/12/12 | 0.264 | 1.663 | 0.04 | 1.45 | 1.2953 |
| 10/5/12 | 0.26 | 1.737 | 0.06 | 1.52 | 1.3036 |
| 9/28/12 | 0.236 | 1.631 | 0.02 | 1.44 | 1.2859 |
| 9/21/12 | 0.26 | 1.753 | 0.04 | 1.60 | 1.2981 |
| 9/14/12 | 0.252 | 1.863 | 0.10 | 1.71 | 1.3130 |
| 9/7/12 | 0.252 | 1.668 | 0.03 | 1.52 | 1.2816 |
| 8/31/12 | 0.225 | 1.543 | -0.03 | 1.33 | 1.2575 |
| 8/24/12 | 0.266 | 1.684 | -0.01 | 1.35 | 1.2512 |
| 8/17/12 | 0.288 | 1.814 | -0.04 | 1.50 | 1.2335 |
| 8/10/12 | 0.267 | 1.658 | -0.07 | 1.38 | 1.2290 |
| 8/3/12 | 0.242 | 1.569 | -0.02 | 1.42 | 1.2387 |
| 7/27/12 | 0.244 | 1.544 | -0.03 | 1.40 | 1.2320 |
| 7/20/12 | 0.207 | 1.459 | -0.07 | 1.17 | 1.2158 |
| 7/13/12 | 0.24 | 1.49 | -0.04 | 1.26 | 1.2248 |
| 7/6/12 | 0.272 | 1.548 | -0.01 | 1.33 | 1.2288 |
| 6/29/12 | 0.305 | 1.648 | 0.12 | 1.58 | 1.2661 |
| 6/22/12 | 0.309 | 1.676 | 0.14 | 1.58 | 1.2570 |
| 6/15/12 | 0.272 | 1.584 | 0.07 | 1.44 | 1.2640 |
| 6/8/12 | 0.268 | 1.635 | 0.04 | 1.33 | 1.2517 |
| 6/1/12 | 0.248 | 1.454 | 0.01 | 1.17 | 1.2435 |
| 5/25/12 | 0.291 | 1.738 | 0.05 | 1.37 | 1.2518 |
| 5/18/12 | 0.292 | 1.714 | 0.05 | 1.43 | 1.2780 |
| 5/11/12 | 0.248 | 1.845 | 0.09 | 1.52 | 1.2917 |
| 5/4/12 | 0.256 | 1.876 | 0.08 | 1.58 | 1.3084 |
| 4/6/12 | 0.31 | 2.058 | 0.14 | 1.74 | 1.3096 |
| 3/30/12 | 0.335 | 2.214 | 0.21 | 1.79 | 1.3340 |
| 3/2/12 | 0.29 | 1.977 | 0.16 | 1.80 | 1.3190 |
| 2/24/12 | 0.307 | 1.977 | 0.24 | 1.88 | 1.3449 |
| 1/6/12 | 0.256 | 1.957 | 0.17 | 1.85 | 1.2720 |
| 12/30/11 | 0.239 | 1.871 | 0.14 | 1.83 | 1.2944 |
| 8/26/11 | 0.20 | 2.202 | 0.65 | 2.16 | 1.450 |
| 8/19/11 | 0.192 | 2.066 | 0.65 | 2.11 | 1.4390 |
| 6/7/10 | 0.74 | 3.17 | 0.49 | 2.56 | 1.192 |
| 3/5/09 | 0.89 | 2.83 | 1.19 | 3.01 | 1.254 |
| 12/17/08 | 0.73 | 2.20 | 1.94 | 3.00 | 1.442 |
| 10/27/08 | 1.57 | 3.79 | 2.61 | 3.76 | 1.246 |
| 7/14/08 | 2.47 | 3.88 | 4.38 | 4.40 | 1.5914 |
| 6/26/03 | 1.41 | 3.55 | NA | 3.62 | 1.1423 |
Note: DE: Germany
Source:
http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
http://www.federalreserve.gov/releases/h15/data.htm
http://www.ecb.int/stats/money/long/html/index.en.html
Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year, two-year and one-month Treasury constant maturity yields. The beginning yields in Chart III-1A for July 31, 2001, are 3.67 percent for one month, 3.79 percent for two years and 5.07 percent for ten years. On July 31, 2007, yields inverted with the one month at 5.13 percent, the two-year at 4.56 percent and the ten year at 5.13 percent. During the beginning of the flight from risk financial assets to US government securities (see Cochrane and Zingales 2009), the one-month yield was 0.07 percent, the two-year yield 1.64 percent and the ten-year yield 3.41. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe. The final point of Chart III1-A is for Jan 31, 2013, with the one-month yield at 0.04 percent, the two-year at 0.27 percent and the ten-year at 2.02 percent.
Chart III-1A, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields Jul 31, 2001-Jan 31, 2013
Note: US Recessions in shaded areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/update/
Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:
Where Rτ is expected revenue in the time horizon from τ =1 to T; Cτ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or
![clip_image082[1]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgifHYkvLjXSEGD4JdRrCwE2ZCszfckuxyxlc_c1GlRgnu1lrSyonSdz2hDRJgkAnnbphwbyGtzw3VzwDZ3hS9rAri9WNTRm5LyIQvrrIqJGzt4Uxj8RXUayVPjF1J-UWtWewjiCq9DuCQW/s1600-h/clip_image082%25255B1%25255D%25255B2%25255D.gif "clip_image082[1]"){kind=small}
declines.
There was strong performance in equity indexes in Table III-1 in the week ending on Feb 1, 2013. Stagnating revenues are causing reevaluation of discounted net earnings with deteriorating views on the world economy and United States fiscal sustainability but investors have been driving indexes higher. DJIA increased 1.1 percent on Feb 1, increasing 0.8 percent in the week. Germany’s Dax increased 0.7 percent on Fri Feb 1 and decreased 0.3 percent in the week. Dow Global increased 0.7 percent on Feb 1 and increased 0.6 percent in the week. Japan’s Nikkei Average increased 0.5 percent on Fri Jan Feb 1 and increased 2.4 percent in the week as the yen continues to be oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a new administration. Dow Asia Pacific TSM decreased 0.4 percent on Feb 1 and increased 0.8 percent in the week while Shanghai Composite increased 1.4 percent on Feb 1 and increased 5.6 percent in the week supported by stronger GDP and economic data, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2419.02 on Fri Feb 1. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations, causing oscillation in equity markets with increases during favorable risk appetite.
Commodities were stronger in the week of Feb 1, 2013. The DJ UBS Commodities Index increased 0.3 percent on Fri Feb 1 and increased 1.6 percent in the week, as shown in Table III-1. WTI increased 1.8 percent in the week of Feb 1 while Brent increased 2.9 percent in the week. Gold increased 0.2 percent on Fri Feb 1 and increased 0.7 percent in the week.
Table III-2 provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the long-term refinancing operations (LTROs). Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increased from €546,747 million on Dec 31, 2010, to €879,130 million on Dec 28, 2011 and €1,156,233 million on Jan 25, 2013. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,739,008 million in the statement of Jan 25, 2013. There is high credit risk in these transactions with capital of only €85,610 million as analyzed by Cochrane (2012Aug31).
Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR
| Dec 31, 2010 | Dec 28, 2011 | Jan 25, 2013 | |
| 1 Gold and other Receivables | 367,402 | 419,822 | 438,686 |
| 2 Claims on Non Euro Area Residents Denominated in Foreign Currency | 223,995 | 236,826 | 253,908 |
| 3 Claims on Euro Area Residents Denominated in Foreign Currency | 26,941 | 95,355 | 31,210 |
| 4 Claims on Non-Euro Area Residents Denominated in Euro | 22,592 | 25,982 | 21,996 |
| 5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro | 546,747 | 879,130 | 1,156,233 |
| 6 Other Claims on Euro Area Credit Institutions Denominated in Euro | 45,654 | 94,989 | 131,320 |
| 7 Securities of Euro Area Residents Denominated in Euro | 457,427 | 610,629 | 582,775 |
| 8 General Government Debt Denominated in Euro | 34,954 | 33,928 | 29,962 |
| 9 Other Assets | 278,719 | 336,574 | 282,690 |
| TOTAL ASSETS | 2,004, 432 | 2,733,235 | 2,928,781 |
| Memo Items | |||
| Sum of 5 and 7 | 1,004,174 | 1,489,759 | 1,739,008 |
| Capital and Reserves | 78,143 | 85,748 | 85,610 |
Source: European Central Bank
http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html
http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html
http://www.ecb.int/press/pr/wfs/2013/html/fs130129.en.html
IIIE Appendix Euro Zone survival risk. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table III-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU), or euro area, are only 42.6 percent of the total. Exports to the non-European Union area with share of 44.0 percent in Italy’s total exports are growing at 9.6 percent in Jan-Nov 2012 relative to Jan-Nov 2011 while those to EMU are falling at 1.0 percent.
Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%
| Nov 2012 | Exports | ∆% Jan-Nov 2012/ Jan-Nov 2011 | Imports | Imports |
| EU | 56.0 | -0.1 | 53.7 | -7.3 |
| EMU 17 | 42.6 | -1.0 | 43.4 | -7.2 |
| France | 11.6 | 0.1 | 8.4 | -6.4 |
| Germany | 13.1 | -0.3 | 15.5 | -11.1 |
| Spain | 5.3 | -8.0 | 4.5 | -8.0 |
| UK | 4.7 | 9.6 | 2.7 | -13.4 |
| Non EU | 44.0 | 10.0 | 46.3 | -3.7 |
| Europe non EU | 13.3 | 9.6 | 10.8 | -1.4 |
| USA | 6.1 | 18.5 | 3.2 | -1.2 |
| China | 2.7 | -10.0 | 7.4 | -16.7 |
| OPEC | 4.7 | 25.6 | 8.5 | 21.2 |
| Total | 100.0 | 4.3 | 100.0 | -5.6 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/79713
Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €559 million with the 17 countries of the euro zone (EMU 17) in Nov 2012 and deficit of €2194 million in Jan-Nov 2012. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €10,857 million in Jan-Nov 2012 with Europe non European Union and of €12,716 million with the US and in reducing the deficit with non European Union of €1251 million in Jan-Nov 2012. There is significant rigidity in the trade deficits in Jan-Nov of €15,005 million with China and €18,209 million with members of the Organization of Petroleum Exporting Countries (OPEC). Higher exports could drive economic growth in the economy of Italy that would permit less onerous adjustment of the country’s fiscal imbalances, raising the country’s credit rating.
Table III-4, Italy, Trade Balance by Regions and Countries, Millions of Euro
| Regions and Countries | Trade Balance Nov 2012 Millions of Euro | Trade Balance Cumulative Jan-Nov 2012 Millions of Euro |
| EU | 508 | 10,111 |
| EMU 17 | -559 | -2,194 |
| France | 1,074 | 11,262 |
| Germany | -632 | -5,472 |
| Spain | 193 | 1,514 |
| UK | 842 | 8,841 |
| Non EU | 1,855 | -1,251 |
| Europe non EU | 1,320 | 10,857 |
| USA | 1,325 | 12,716 |
| China | -838 | -15,005 |
| OPEC | -1,355 | -18,209 |
| Total | 2,363 | 8,860 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/79713
Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan-Nov 2012 relative to Jan-Nov 2011. Growth rates in 12 months of imports are negative with the exception of 7.9 percent for energy. The higher rate of growth of exports of 4.3 percent in Jan-Nov 2012/Jan-Nov 2011 relative to imports of minus 5.6 percent may reflect weak demand in Italy with GDP declining during five consecutive quarters from IIIQ2011 through IIIQ2012.
Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%
| Exports | Exports | Imports | Imports | |
| Consumer | 28.9 | 5.4 | 25.0 | -3.0 |
| Durable | 5.9 | 3.2 | 3.0 | -6.7 |
| Non | 23.0 | 6.0 | 22.0 | -2.5 |
| Capital Goods | 32.3 | 2.3 | 21.1 | -12.9 |
| Inter- | 34.2 | 2.9 | 34.3 | -10.7 |
| Energy | 4.7 | 21.7 | 19.6 | 7.9 |
| Total ex Energy | 95.3 | 3.5 | 80.4 | -8.9 |
| Total | 100.0 | 4.3 | 100.0 | -5.6 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/79713
Table III-6 provides Italy’s trade balance by product categories in Nov 2012 and cumulative Jan-Nov 2012. Italy’s trade balance excluding energy generated surplus of €7027 million in Nov 2012 and €67,201 million in Jan-Nov 2012 but the energy trade balance created deficit of €4664 million in Nov 2012 and €58,341 million in Jan-Nov 2012. The overall surplus in Nov 2012 was €2363 million with surplus of €8860 million in Jan-Nov 2012. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.
Table III-6, Italy, Trade Balance by Product Categories, € Millions
| Nov 2012 | Cumulative Jan-Nov 2012 | |
| Consumer Goods | 2,105 | 15,515 |
| Durable | 1,227 | 10,598 |
| Nondurable | 877 | 4,917 |
| Capital Goods | 4,270 | 44,859 |
| Intermediate Goods | 652 | 6,827 |
| Energy | -4,664 | -58,341 |
| Total ex Energy | 7,027 | 67,201 |
| Total | 2,363 | 8,860 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/79713
Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.
The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30 the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).
Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.
Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:
“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”
If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.
The prospects of survival of the euro zone are dire. Table III-7 is constructed with IMF World Economic Outlook database (http://www.imf.org/external/datamapper/index.php?db=WEO) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.
Table III-7, World and Selected Regional and Country GDP and Fiscal Situation
| GDP 2012 | Primary Net Lending Borrowing | General Government Net Debt | |
| World | 71,277 | ||
| Euro Zone | 12,065 | -0.5 | 73.4 |
| Portugal | 211 | -0.7 | 110.9 |
| Ireland | 205 | -4.4 | 103.0 |
| Greece | 255 | -1.7 | 170.7 |
| Spain | 1,340 | -4.5 | 78.6 |
| Major Advanced Economies G7 | 33,769 | -5.1 | 89.0 |
| United States | 15,653 | -6.5 | 83.8 |
| UK | 2,434 | -5.6 | 83.7 |
| Germany | 3,367 | 1.4 | 58.4 |
| France | 2,580 | -2.2 | 83.7 |
| Japan | 5,984 | -9.1 | 135.4 |
| Canada | 1,770 | -3.2 | 35.8 |
| Italy | 1,980 | 2.6 | 103.1 |
| China | 8,250 | -1.3* | 22.2** |
*Net Lending/borrowing**Gross Debt
Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO
The data in Table III-7 are used for some very simple calculations in Table III-8. The column “Net Debt USD Billions” in Table III-8 is generated by applying the percentage in Table III-7 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2012 is $4155.8 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3975.1 billion, adding rows D+E+F+G+H in column “Net Debt USD billions.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table III-8. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8130.8 billion, which would be equivalent to 136.7 percent of their combined GDP in 2012. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 241.5 percent if including debt of France and 177.4 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.
Table III-8, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %
| Net Debt USD Billions | Debt as % of Germany Plus France GDP | Debt as % of Germany GDP | |
| A Euro Area | 8,855.7 | ||
| B Germany | 1,996.3 | $8130.9 as % of $3367 =241.5% $5971.4 as % of $3367 =177.4% | |
| C France | 2,159.5 | ||
| B+C | 4,155.8 | GDP $5,947.0 Total Debt $8130.9 Debt/GDP: 136.7% | |
| D Italy | 2,041.4 | ||
| E Spain | 1,053.2 | ||
| F Portugal | 234.0 | ||
| G Greece | 435.3 | ||
| H Ireland | 211.2 | ||
| Subtotal D+E+F+G+H | 3,975.1 |
Source: calculation with IMF data http://www.imf.org/external/datamapper/index.php?db=WEO
There is extremely important information in Table III-9 for the current sovereign risk crisis in the euro zone. Table III-9 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Nov 2012. German exports to other European Union (EU) members are 56.3 percent of total exports in Nov 2012 and 57.1 percent in Jan-Nov 2012. Exports to the euro area are 37.2 percent in Nov and 37.6 percent in Jan-Nov. Exports to third countries are 43.7 percent of the total in Nov and 42.9 percent in Jan-Nov. There is similar distribution for imports. Exports to non-euro countries are decreasing 0.6 percent in Nov 2012 and increasing 3.9 percent in Jan-Nov 2012 while exports to the euro area are decreasing 5.7 percent in Nov and decreasing 1.7 percent in Jan-Nov 2012. Exports to third countries, accounting for 43.7 percent of the total in Nov 2012, are increasing 5.6 percent in Nov and 10.4 percent in Jan-Nov, accounting for 42.9 percent of the cumulative total in Jan-Nov 2012. Price competitiveness through devaluation could improve export performance and growth. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of high share in its exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.
Table III-9, Germany, Structure of Exports and Imports by Region, € Billions and ∆%
| Nov 2012 | Nov 12-Month | Jan–Nov 2012 € Billions | Jan-Nov 2012/ | |
| Total | 94.1 | 0.0 | 1,018.4 | 4.3 |
| A. EU | 53.0 % 56.3 | -4.0 | 581.5 % 57.1 | 0.2 |
| Euro Area | 35.0 % 37.2 | -5.7 | 382.8 % 37.6 | -1.7 |
| Non-euro Area | 18.0 % 19.1 | -0.6 | 198.8 % 19.5 | 3.9 |
| B. Third Countries | 41.1 % 43.7 | 5.6 | 436.9 % 42.9 | 10.4 |
| Total Imports | 77.1 | -1.2 | 842.2 | 1.4 |
| C. EU Members | 50.0 % 64.9 | 0.9 | 534.4 % 63.5 | 1.6 |
| Euro Area | 34.8 % 45.1 | 1.1 | 374.0 % 44.4 | 1.3 |
| Non-euro Area | 15.3 % 19.8 | 0.5 | 160.4 % 19.1 | 2.3 |
| D. Third Countries | 27.0 % 35.0 | -4.9 | 307.8 % 36.6 | 1.1 |
Notes: Total Exports = A+B; Total Imports = C+D
Source:
Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2013/01/PE13_005_51.html;jsessionid=EAAD291DC09A1212A967AB76756E5FFC.cae2
IIIF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.
First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:
D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)
Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,
{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:
N(t+1) = (1+n)N(t), n>-1 (2)
The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:
B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)
On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.
Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)
Equation (4) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The second equation of Cochrane (2011Jan, 5) is:
MtV(it, ·) = PtYt (5)
Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):
“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”
An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.
There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:
(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress
(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality
(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.
IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.
Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 1.5 | 1.7 | 1.3 | 7.9 |
| Japan | 0.5 | -0.1 | -0.6 | 4.2 |
| China | 7.9 | 2.5 | -1.9 | |
| UK | 0.0 | 2.7* | 2.2* output | 7.7 |
| Euro Zone | -0.6 | 2.2 | 2.1 | 11.7 |
| Germany | 0.9 | 2.0 | 1.4 | 5.3 |
| France | 0.0 | 1.5 | 1.9 | 10.6 |
| Nether-lands | -1.4 | 3.4 | 4.0 | 5.8 |
| Finland | -1.1 | 3.5 | 2.3 | 7.7 |
| Belgium | -0.3 | 2.1 | 5.3 | 7.5 |
| Portugal | -3.4 | 2.1 | 3.8 | 16.5 |
| Ireland | -0.5 | 1.6 | 2.8 | 14.7 |
| Italy | -2.4 | 2.6 | 2.2 | 11.2 |
| Greece | -7.2 | 0.3 | 2.5 | NA |
| Spain | -1.6 | 3.0 | 2.8 | 26.1 |
Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier
*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/december-2012/index.html **Core
PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/december-2012/index.html
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/; country statistical sources http://www.census.gov/aboutus/stat_int.html
Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 1.5 percent in IVQ2012 relative to IVQ2011 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_adv.pdf See II Mediocre and Decelerating United States Economic Growth and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html). Japan’s GDP fell 0.2 percent in IVQ2011 relative to IVQ2010 and contracted 1.6 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 10.4 percent in IIIQ2011, increasing at the SAAR of 0.3 percent in IVQ 2011, increasing at the SAAR of 5.7 percent in IQ2012 and decreasing at 0.1 percent in IIQ2012 but contracting at the SAAR of 3.5 percent in IIIQ2012 (see Section VB at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html ); the UK grew at minus 0.3 percent in IVQ2012 relative to IIIQ2012 and GDP changed 0.0 percent in IVQ2012 relative to IVQ2011 (see Section VH and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/united-states-commercial-banks-assets.html); and the Euro Zone grew at minus 0.1 percent in IIIQ2012, IIIQ2011 (see Section VD at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal_18.html). These are stagnating or “growth recession” rates, which are positive or about nil growth rates with some contractions that are insufficient to recover employment. The rates of unemployment are quite high: 7.7 percent in the US but 19.4 percent for unemployment/underemployment or job stress of 31.4 million (see Table I-4 and earlier at http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html), 4.2 percent for Japan (see Section VB and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_2.html), 7.7 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH http://cmpassocregulationblog.blogspot.com/2013/01/united-states-commercial-banks-assets.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.7 percent in the US, -0.1 percent for Japan, 2.5 percent for China, 2.2 percent for the Euro Zone and 2.7 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III and earlier http://cmpassocregulationblog.blogspot.com/2013/01/united-states-commercial-banks-assets.html); (2) the tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition; (3) slow growth by repression of savings with de facto interest rate controls (see IIB and earlier http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html), weak hiring with the loss of 10 million full-time jobs (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (Section I and earlier at http://cmpassocregulationblog.blogspot.com/2013/01/thirty-million-unemployed-or.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see Section I http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.
In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.
Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):
“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.
Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.
The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”
Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:
“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”
The Federal Open Market Committee (FOMC) decided at its meeting on Dec 12, 2012 to implement the “6.5/2.5” approach (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):
“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
Unconventional monetary policy will remain in perpetuity, or QE∞, changing to a “growth mandate.” There are two reasons explaining unconventional monetary policy of QE∞: insufficiency of job creation to reduce unemployment/underemployment at current rates of job creation; and growth of GDP at 1.5 percent, which is well below 3.0 percent estimated by Lucas (2011May) from 1870 to 2010. Unconventional monetary policy interprets the dual mandate of low inflation and maximum employment as mainly a “growth mandate” of forcing economic growth in the US at a rate that generates full employment. A hurdle to this “growth mandate” is that the US economy grew at 6.2 percent on average during cyclical expansions in the postwar period while growth has been at only 2.1 percent on average in the cyclical expansion in the 14 quarters from IIIQ2009 to IVQ2012. Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.
First, the average increase of 165,900 new nonfarm jobs per month in the US from Mar to Dec 2012 or 166,000 created in Jan 2013 is insufficient even to absorb 113,167 new entrants per month into the labor force. The difference between the average increase of 165,900 new private nonfarm jobs per month in the US from Mar to Dec 2012 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 52,733 monthly new jobs net of absorption of new entrants in the labor force. There are 31.4 million in job stress in the US currently. The provision of 52,733 new jobs per month net of absorption of new entrants in the labor force would require 595 months to provide jobs for the unemployed and underemployed (31.4 million divided by 52,733) or 49.6 years (595 divided by 12). The civilian labor force of the US in Jan 2013 not seasonally adjusted stood at 154.794 million with 13.181 million unemployed or effectively 20.354 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.6 years (1 million divided by product of 52,733 by 12, which is 632,796). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.740 million (0.05 times labor force of 154.794 million) for new net job creation of 5.441 million (13.181 million unemployed minus 7.740 million unemployed at rate of 5 percent) that at the current rate would take 8.6 years (5.441 million divided by 632,796). Under the calculation in this blog there are 20.354 million unemployed by including those who ceased searching because they believe there is no job for them. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 12.614 million jobs net of labor force growth that at the current rate would take 19.9 years (12.614 million minus 0.05(161.967 million) divided by 632,796, using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in the US fell from 146.743 million in Oct 2007 to 141.614 million in Jan 2013, by 5.129 million, or 3.5 percent, while the noninstitutional population increased from 232.715 million in Oct 2007 to 244.663 million in Jan 2013, by 11.948 million or increase of 5.1 percent, using not seasonally adjusted data. There is actually not sufficient job creation to merely absorb new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs. Second, calculations show that GDP growth is 1.7 to 1.9 percent. Excluding growth at the SAAR of 2.5 percent in IIQ2011 and 4.1 percent in IVQ2011 while converting growth in IIIQ2012 to 1.3 percent by deducting from 3.1 percent one-time inventory accumulation of 0.73 percentage points and national defense expenditures of 0.64 percentage points and converting growth in IVQ2012 by adding 1.27 percentage points of inventory divestment and 1.28 percentage points of national defense expenditure reductions to obtain 2.54 percent, the US economy grew at 1.7 percent in the remaining six quarters {[(1.00025x1.0032x1.005x1.0032x1.0077x0.0063)4/6 – 1]100 = 1.7%} with declining growth trend in three consecutive quarters from 4.1 percent in IVQ2011, to 2.0 percent in IQ2012, 1.3 percent in IIQ2012, 3.1 percent in IIIQ2012 that is more like 1.73 percent without inventory accumulation and national defense expenditures and -0.1 percent in IVQ2012 that is more likely 2.54 percent by adding 1.27 percentage points of inventory divestment and 1.28 percentage points of national defense expenditures. Weakness of growth is more clearly shown by adjusting the exceptional one-time contributions to growth from items that are not aggregate demand: 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011; 0.64 percentage points contributed by expenditures in national defense together with 0.73 points of inventory accumulation to growth of 3.1 percent in IIIQ2012; and deduction of 1.27 percentage points of inventory divestment and 1.28 percentage points of national defense expenditure reductions. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Wed Jan 30, 2012, the first or advanced estimate of GDP for IVQ2012 at minus 0.1 percent seasonally-adjusted annual rate (SAAR) (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_adv.pdf). In the four quarters of 2012, the US economy is growing at the annual equivalent rate of 1.9 percent {([(1.021/4(1.013)1/4(1.0173)1/4(1.0254)1/4]-1)100 = 1.89%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding 1.28 percentage points of national defense expenditure reductions and 1.27 percentage points of inventory divestment to growth of minus 0.1 percent SAAR in IVQ2012 to obtain 2.54 percent.
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is concern of the production and employment costs of controlling future inflation. Even if there is no inflation, QE∞ cannot be abandoned because of the fear of rising interest rates. The economy would operate in an inferior allocation of resources and suboptimal growth path, or interior point of the production possibilities frontier where the optimum of productive efficiency and wellbeing is attained, because of the distortion of risk/return decisions caused by perpetual financial repression. Not even a second-best allocation is feasible with the shocks to efficiency of financial repression in perpetuity.
The statement of the FOMC at the conclusion of its meeting on Dec 12, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm) practically unchanged in the statement at the conclusion of its meeting on Jan 30, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130130a.htm):
“Release Date: December 12, 2012
For immediate release
Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”
There are several important issues in this statement.
1. Mandate. The FOMC pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):
“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”
2. Open-ended Quantitative Easing or QE∞. Earlier programs are continued with an additional open-ended $85 billion of bond purchases per month: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.”
3. Advance Guidance on “6 ¼ 2 ½ “Rule. Policy will be accommodative even after the economy recovers satisfactorily: “o support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
4. Monitoring and Policy Focus on Jobs. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”
Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output that is actually a target of growth forecast. The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until 2015 or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html; see Shultz et al 2012), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness.
Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Dec 12, 2012. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IVQ2012 is analyzed in II Mediocre and Decelerating United States Economic Growth (and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html) and the PCE inflation data from the report on personal income and outlays (Section IV and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html). The Bureau of Economic Analysis (BEA) provides the advance estimate of IVQ2012 GDP and annual for 2012 with the second estimate be released on Feb 28 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm See Section I at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in sections IIB and IV in this blog and the report for Nov 2012 at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html. The next report on “Personal Income and Outlays” for Jan will be released at 8:30 AM on Mar 1, 2013 (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm). PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog (the Nov report at http://cmpassocregulationblog.blogspot.com/2012/12/twenty-eight-million-unemployed-or.html; the Oct report is analyzed in this blog at http://cmpassocregulationblog.blogspot.com/2012/11/twenty-eight-million-unemployed-or.html; the Sep report is analyzed in this blog at http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or_7.html; the Aug report is in Section I at http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or.html and the Jul report is analyzed at http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html). The report for Dec was released on Fri Jan 4, 2013 (http://www.bls.gov/ces/) and analyzed in this blog comment. The report for Jan 2013 will be released on Mar 8, 2013 (http://www.bls.gov/ces/) and analyzed in this blog on Mar 10, 2013. “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf).
It is instructive to focus on 2012 and 2013 as 2014, 2015 and longer term are too far away, and there is not much information even on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Dec 12, 2012 and the second row “PR” the projection of the Sep 13, 2012 meeting. There are three major changes in the view.
1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun 2011 to 2.5 to 2.9 percent in Nov 2011 and 2.2 to 2.7 percent at the Jan 25 meeting but increased it to 2.4 to 2.9 percent at the Apr 25, 2012 meeting, reducing it to 1.9 to 2.4 percent at the Jun 20, 2012 meeting and further to 1.7 to 2.0 percent at the Sep 13, 2012 meeting and 1.7 to 1.8 percent at the Dec 12, 2012 meeting. GDP growth in 2013 has been increased to 2.5 to 3.0 percent at the meeting on Sep 13
2012 from 2.2 to 2.8 percent at the meeting on Jun 20, 2012 but reduced to 2.3 to 3.0 percent at the Dec 12, 2012 meeting.
2. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun 2011 to 8.5 to 8.7 percent in Nov 2011 but has reduced it to 8.2 to 8.5 percent at the Jan 25 meeting and further down to 7.8 to 8.0 percent at the Apr 25, 2012 meeting but increased it to 8.0 to 8.2 percent at the Jun 20, 2012 meeting and did not change it at 8.0 to 8.2 at the meeting on Sep 13, 2012, lowering the projection to 7.8 to 7.9 percent at the Dec 12, 2012 meeting. The rate of unemployment for 2013 has been changed to 7.6 to 7.9 percent at the Sep 13 meeting compared with 7.5 to 8.0 percent at the Jun 20 meeting and reduced to 7.4 to 7.7 percent at the Dec 12 meeting.
3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun 2011 to virtually the same of 1.4 to 2.0 percent in Nov 2011 but has reduced it to 1.4 to 1.8 percent at the Jan 25 meeting but increased it to 1.9 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.2 to 1.7 percent at the Jun 20, 2012 meeting. The interval was increased to 1.7 to 1.8 percent at the Sep 13, 2012 meeting and 1.6 to 1.7 percent at the Dec 12, 2012 meeting.
4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun 2011 of 1.4 to 2.0 percent and the Nov 2011 projection of 1.5 to 2.0 percent, which has been reduced slightly to 1.5 to 1.8 percent at the Jan 25 meeting but increased to 1.8 to 2.0 percent at the Apr 25, 2012 meeting, reducing it to 1.7 to 2.0 percent at the Jun 20, 2012 meeting. The projection was virtually unchanged at 1.7 to 1.9 percent at the Sep 13 meeting. For 2013, the projection for core inflation was changed from 1.6 to 2.0 percent at the Jun 20, 2012 meeting to 1.7 to 2.0 percent at the Sep 13, 2012 meeting and lowered to 1.7 to 1.9 percent at the Dec 12, 2012 meeting.
Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, June 2012 and Sep 2012
| ∆% GDP | UNEM % | ∆% PCE Inflation | ∆% Core PCE Inflation | |
| Central | ||||
| 2012 Sep PR | 1.7 to 1.8 1.7 to 2.0 | 7.8 to 7.9 8.0 to 8.2 | 1.6 to 1.7 1.7. to 1.8 | 1.6 to 1.7 1.7 to 1.9 |
| 2013 | 2.3 to 3.0 | 7.4 to 7.7 | 1.3 to 2.0 | 1.6 to 1.9 1.7 to 2.0 |
| 2014 | 3.0 to 3.5 | 6.8 to 7.3 | 1.5 to 2.0 | 1.6 to 2.0 |
| 2015 | 3.0 to 3.7 3.0 to 3.8 | 6.0 to 6.6 6.0 to 6.8 | 1.7 to 2.0 1.8 to 2.0 | 1.8 to 2.0 1.9 to 2.0 |
| Longer Run Sep PR | 2.3 to 2.5 2.3 to 2.5 | 5.2 to 6.0 5.2 to 6.0 | 2.0 2.0 | |
| Range | ||||
| 2012 | 1.6 to 2.0 | 7.7 to 8.0 | 1.6 to 1.8 | 1.6 to 1.8 |
| 2013 | 2.0 to 3.2 | 6.9 to 7.8 | 1.3 to 2.0 | 1.5 to 2.0 |
| 2014 | 2.8 to 4.0 | 6.1 to 7.4 | 1.4 to 2.2 | 1.5 to 2.0 |
| 2015 Sep PR | 2.5 to 4.2 2.5 to 4.2 | 5.7 to 6.8 5.7 to 6.9 | 1.5 to 2.2 1.8 to 2.3 | 1.7 to 2.2 1.8 to 2.3 |
| Longer Run Sep PR | 2.2 to 3.0 2.2 to 3.0 | 5.0 to 6.0 5.0 to 6.3 | 2.0 2.0 |
Notes: UEM: unemployment; PR: Projection
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf
Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):
“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.
The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”
The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html See Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 99-116). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.
The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf). There are 19 participants expecting the rate to remain at 0 to ¼ percent in 2012 and none to be higher. Not much change is expected in 2013 either with 17 participants anticipating the rate at the current target of 0 to ¼ percent and only two expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for 14 participants with three expecting the rate to be in the range of 1.0 to 2.0 percent, one participant expecting rates at 0.5 to 1.0 percent and one participant expecting rates from 2.0 to 3.0. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014. For 2015, nine participants expect rates to be below 1.0 percent while nine expect rates from 1.0 to 4.5 percent. In the long-run, all 19 participants expect rates to be between 3.0 and 4.5 percent.
Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012
| 0 to 0.25 | 0.5 to 1.0 | 1.0 to 1.5 | 1.0 to 2.0 | 2.0 to 3.0 | 3.0 to 4.5 | |
| 2012 | 19 | |||||
| 2013 | 17 | 1 | 1 | |||
| 2014 | 14 | 1 | 3 | 1 | ||
| 2015 | 1 | 8 | 6 | 1 | 3 | |
| Longer Run | 19 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf
Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2012 to 2015. It is evident from Table IV-4 that the prevailing view in the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2.
Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012
| Appropriate Year of Increasing Target Fed Funds Rate | Number of Participants |
| 2012 | 1 |
| 2013 | 2 |
| 2014 | 3 |
| 2015 | 13 |
| 2016 | 1 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf
The Bureau of Economic Analysis (BEA) provides the annual revision of the national income and product accounts since Jan 2009 through May 2009 in the report on personal income and outlays for Jun 2012 released on Jul 31, 2012 (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0612.pdf), including prices of personal consumption expenditures (PCE) and for Jul 2012 released on Aug 30 (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0712.pdf) and the release for Dec 2012 (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). There are waves of inflation similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html) in inflation of personal consumption expenditures (PCE) in Table IV-5. These waves are in part determined by commodity price shocks originating in the carry trade from zero interest rates to positions in risk financial assets, in particular in commodity futures, which increase the prices of food and energy when there is relaxed risk aversion. Return of risk aversion causes collapse in prices. The first wave is in Jan-Apr 2011 when headline PCE inflation grew at the average annual equivalent rate of 4.0 percent and PCE inflation excluding food and energy (PCEX) at 2.1 percent. The drivers of inflation were increases in food prices (PCEF) at the annual equivalent rate of 7.4 percent and of energy prices (PCEE) at 29.8 percent. This behavior will prevail under zero interest rates and relaxed risk aversion because of carry trades from zero interest rates to leveraged positions in commodity futures. The second wave occurred in May-Jun 2011 when risk aversion from the European sovereign risk crisis interrupted the carry trade. PCE prices increased 1.8 percent in annual equivalent and 2.4 percent excluding food and energy. The third wave is captured by the annual equivalent rates in Jul-Sep 2011 of headline PCE inflation of 2.4 percent with subdued PCE inflation excluding food and energy of 1.6 percent while PCE food rose at 6.2 percent and PCE energy increased at 13.6 percent. In the fourth wave in Oct-Dec 2011, increased risk aversion explains the fall of the annual equivalent rate of inflation to 0.8 for headline PCE inflation and 1.6 percent for PCEX excluding food and energy. PCEF of prices of food rose at the annual equivalent rate of 1.6 percent in Oct-Dec 2011 while PCEE of prices of energy fell at the annual equivalent rate of 13.5 percent. In the fifth wave in Jan-Mar 2012, headline PCE in annual equivalent was 3.3 percent and 2.4 percent excluding food and energy (PCEX). Energy prices of personal consumption (PCEE) increased at the annual equivalent rate of 21.3 percent because of the jump of 3.6 percent in Feb followed by 1.0 percent in Mar. In the sixth wave, renewed risk aversion caused reversal of carry trades with headline PCE inflation falling at the annual equivalent rate of 1.2 percent in Apr-May 2012 while PCE inflation excluding food and energy increased at the annual equivalent rate of 1.2 percent. In the seventh wave, further shocks of risk aversion resulted in headline PCE annual equivalent inflation at 1.2 percent in Jun-Jul 2012 with core PCE excluding food and energy at 1.8 percent. In the eighth wave, temporarily relaxed risk aversion with zero interest rates resulted in central PCE inflation at 4.3 percent annual equivalent in Aug-Sep 2012 with PCEX excluding food and energy at 0.6 percent while PCEE energy jumped at 85.8 percent annual equivalent. In the ninth wave, prices collapsed with reversal of carry trade positions in a new episode of risk aversion with central PCE at annual equivalent minus 0.4 percent in Oct-Dec 2012 and PCEX at 0.4 percent while energy prices fell at minus 24.6 percent.
Table IV-5, US, Percentage Change from Prior Month of Prices of Personal Consumption Expenditures, Seasonally Adjusted Monthly ∆%
| PCE | PCEG | PCEG | PCES | PCEX | PCEF | PCEE | |
| 2012 | |||||||
| Dec | 0.0 | -0.4 | -0.3 | 0.1 | 0.0 | 0.3 | -1.3 |
| Nov | -0.2 | -0.9 | -0.2 | 0.2 | 0.0 | 0.2 | -4.4 |
| Oct | 0.1 | 0.0 | -0.2 | 0.2 | 0.1 | 0.3 | -0.1 |
| ∆% AE Oct-Dec | -0.4 | -5.1 | -2.8 | 2.0 | 0.4 | 3.3 | -21.1 |
| Sep | 0.3 | 0.7 | -0.2 | 0.1 | 0.0 | -0.1 | 4.8 |
| Aug | 0.4 | 0.8 | -0.2 | 0.1 | 0.0 | 0.1 | 5.8 |
| ∆% AE Aug-Sep | 4.3 | 9.4 | -2.4 | 1.2 | 0.6 | 0.0 | 85.8 |
| Jul | 0.1 | 0.0 | -0.3 | 0.1 | 0.1 | 0.0 | -0.2 |
| Jun | 0.1 | -0.1 | -0.1 | 0.2 | 0.2 | 0.2 | -1.5 |
| ∆% AE Jun-Jul | 1.2 | -0.6 | -2.4 | 1.8 | 1.8 | 1.2 | -9.8 |
| May | -0.2 | -0.8 | 0.0 | 0.1 | 0.1 | -0.1 | -4.7 |
| Apr | 0.0 | -0.3 | -0.2 | 0.2 | 0.1 | 0.1 | -1.8 |
| ∆% AE Apr- May | -1.2 | -6.4 | -1.2 | 1.8 | 1.2 | 0.0 | -32.8 |
| Mar | 0.2 | 0.3 | -0.1 | 0.2 | 0.2 | 0.1 | 1.0 |
| Feb | 0.3 | 0.6 | 0.0 | 0.2 | 0.1 | 0.0 | 3.6 |
| Jan | 0.3 | 0.3 | 0.1 | 0.2 | 0.3 | 0.1 | 0.3 |
| ∆% AE Jan- Mar | 3.3 | 4.9 | 0.0 | 2.4 | 2.4 | 0.8 | 21.3 |
| 2011 | |||||||
| Dec | 0.1 | -0.2 | -0.2 | 0.2 | 0.2 | 0.2 | -1.4 |
| Nov | 0.1 | -0.1 | -0.3 | 0.1 | 0.1 | 0.0 | -0.5 |
| Oct | 0.0 | -0.2 | -0.1 | 0.1 | 0.1 | 0.2 | -1.7 |
| ∆% AE Oct- Dec | 0.8 | -2.0 | -2.4 | 1.6 | 1.6 | 1.6 | -13.5 |
| Sep | 0.2 | 0.2 | -0.4 | 0.1 | 0.0 | 0.5 | 1.5 |
| Aug | 0.2 | 0.3 | -0.2 | 0.2 | 0.2 | 0.6 | 0.8 |
| Jul | 0.2 | 0.3 | -0.1 | 0.2 | 0.2 | 0.4 | 0.9 |
| ∆% AE Jul-Sep | 2.4 | 3.3 | -2.8 | 2.0 | 1.6 | 6.2 | 13.6 |
| Jun | 0.1 | 0.1 | 0.2 | 0.1 | 0.2 | 0.3 | -1.2 |
| May | 0.2 | 0.2 | 0.1 | 0.2 | 0.2 | 0.4 | 0.1 |
| ∆% AE May-Jun | 1.8 | 1.8 | 1.8 | 1.8 | 2.4 | 4.3 | -6.4 |
| Apr | 0.3 | 0.5 | 0.2 | 0.2 | 0.2 | 0.3 | 1.9 |
| Mar | 0.4 | 0.8 | 0.0 | 0.2 | 0.1 | 0.8 | 3.5 |
| Feb | 0.3 | 0.6 | 0.2 | 0.2 | 0.2 | 0.7 | 2.5 |
| Jan | 0.3 | 0.5 | 0.1 | 0.1 | 0.2 | 0.6 | 0.9 |
| ∆% AE Jan-Apr | 4.0 | 7.4 | 1.5 | 2.1 | 2.1 | 7.4 | 29.8 |
| 2010 | |||||||
| Dec | 0.2 | 0.6 | -0.4 | 0.0 | 0.0 | 0.2 | 4.2 |
| Nov | 0.1 | 0.2 | -0.2 | 0.1 | 0.1 | 0.1 | 0.8 |
| Oct | 0.2 | 0.5 | -0.2 | 0.1 | 0.1 | 0.2 | 3.1 |
| Sep | 0.1 | 0.2 | -0.1 | 0.1 | 0.1 | 0.2 | 0.8 |
| Aug | 0.2 | 0.3 | 0.1 | 0.1 | 0.1 | 0.1 | 1.5 |
| Jul | 0.2 | 0.2 | -0.3 | 0.1 | 0.1 | 0.1 | 1.8 |
| Jun | 0.0 | -0.2 | -0.3 | 0.1 | 0.1 | -0.1 | -1.0 |
| May | 0.0 | -0.4 | -0.2 | 0.2 | 0.1 | 0.0 | -2.1 |
| Apr | 0.0 | -0.3 | -0.2 | 0.1 | 0.1 | 0.2 | -0.8 |
| Mar | 0.2 | -0.1 | 0.1 | 0.3 | 0.2 | 0.2 | -0.6 |
| Feb | 0.1 | -0.2 | -0.3 | 0.2 | 0.1 | 0.1 | -1.0 |
| Jan | 0.2 | 0.3 | -0.1 | 0.2 | 0.1 | 0.1 | 1.8 |
Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
The charts of PCE inflation are also instructive. Chart IV-1 provides the monthly change of headline PCE price index. There is significant volatility in the monthly changes but excluding outliers fluctuations have been in a tight range between 1999 and 2012 around 0.2 percent per month.
Chart IV-1, US, Percentage Change of PCE Price Index from Prior Month, 1999-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
There is much less volatility in the PCE index excluding food and energy shown in Chart IV-2 with monthly percentage changes from 1999 to 2012. With the exception of 2001 there are no negative changes and again changes around 0.2 percent when excluding outliers.
Chart IV-2, US, Percentage Change of PCE Price Index Excluding Food and Energy from Prior Month, 1999-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Fluctuations in the PCE index of food are much wider as shown in Chart IV-3 by monthly percentage changes from 1999 to 2012. There are also multiple negative changes and positive changes even exceeding 1.0 percent in three months.
Chart IV-3, US, Percentage Change of PCE Price Index Food from Prior Month, 1999-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The band of fluctuation of the PCE price index of energy in Chart IV-4 is much wider. An interesting feature is the abundance of negative changes and large percentages.
Chart IV-4, US, Percentage Change of PCE Price Index Energy from Prior Month, 1999-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Table IV-6 provides 12-month rates of PCE inflation since 2000. Headline PCE inflation has increased from 1.5 percent in Jan 2011 to 2.8 percent in Aug 2011 and 2.9 percent in Sep 2011, declining to 1.3 percent in Dec 2012. PCE inflation excluding food and energy (PCEX), used as indicator in monetary policy, has increased from 1.1 percent in Jan 2011 to 1.9 percent in Dec 2011 and 1.4 percent in Dec 2012, which is still below or at the tolerable maximum of 2.0-2.5 percent in monetary policy. The unintended effect of shocks of commodity prices from zero interest rates captured by PCE food prices (PCEF) and energy (PCEE) in the absence of risk aversion should be weighed in design and implementation of monetary policy. The final row of Table IV-6 provides average rates of 12-month change of PCE prices in Dec. The average for central PCE prices is 2.2 per cent per year from 2000 to 2011 and 1.9 percent for core PCE. PCE food grew at the average rate of 2.6 percent from 2000 to 2011 and energy PCE at 6.1 percent with significant oscillations.
Table IV-6, US, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures ∆%
| PCE | PCEG | PCEG | PCES | PCEX | PCEF | PCEE | |
| 2012 | |||||||
| Dec | 1.3 | 0.3 | -1.7 | 1.9 | 1.4 | 1.3 | 0.9 |
| Nov | 1.4 | 0.4 | -1.7 | 2.0 | 1.5 | 1.3 | 0.8 |
| Oct | 1.7 | 1.3 | -1.8 | 1.9 | 1.6 | 1.0 | 4.9 |
| Sep | 1.6 | 1.1 | -1.6 | 1.9 | 1.5 | 0.9 | 3.2 |
| Aug | 1.4 | 0.6 | -1.8 | 1.9 | 1.5 | 1.5 | 0.0 |
| Jul | 1.3 | 0.1 | -1.8 | 2.0 | 1.7 | 2.0 | -4.7 |
| Jun | 1.5 | 0.4 | -1.6 | 2.1 | 1.8 | 2.4 | -3.6 |
| May | 1.5 | 0.6 | -1.3 | 2.0 | 1.7 | 2.4 | -3.3 |
| Apr | 1.9 | 1.6 | -1.2 | 2.1 | 1.9 | 2.9 | 1.5 |
| Mar | 2.2 | 2.5 | -0.8 | 2.1 | 2.0 | 3.2 | 5.4 |
| Feb | 2.4 | 2.9 | -0.7 | 2.2 | 1.9 | 3.9 | 8.0 |
| Jan | 2.4 | 3.0 | -0.5 | 2.2 | 1.9 | 4.6 | 6.8 |
| 2011 | |||||||
| Dec | 2.4 | 3.1 | -0.5 | 2.1 | 1.9 | 5.1 | 7.4 |
| Nov | 2.6 | 4.0 | -0.6 | 1.9 | 1.7 | 5.0 | 13.5 |
| Oct | 2.6 | 4.2 | -0.5 | 1.8 | 1.6 | 5.2 | 15.1 |
| Sep | 2.9 | 4.9 | -0.7 | 1.9 | 1.6 | 5.1 | 20.7 |
| Aug | 2.8 | 4.9 | -0.4 | 1.8 | 1.6 | 4.8 | 19.8 |
| Jul | 2.8 | 4.8 | -0.2 | 1.8 | 1.5 | 4.3 | 20.6 |
| Jun | 2.7 | 4.7 | -0.4 | 1.7 | 1.4 | 4.0 | 21.6 |
| May | 2.6 | 4.5 | -0.9 | 1.7 | 1.4 | 3.6 | 22.0 |
| Apr | 2.4 | 3.8 | -1.2 | 1.6 | 1.2 | 3.2 | 19.4 |
| Mar | 2.1 | 3.0 | -1.6 | 1.6 | 1.1 | 3.0 | 16.1 |
| Feb | 1.8 | 2.1 | -1.6 | 1.7 | 1.2 | 2.4 | 11.5 |
| Jan | 1.5 | 1.3 | -2.0 | 1.7 | 1.1 | 1.8 | 7.7 |
| 2010 | |||||||
| Dec | 1.5 | 1.1 | -2.2 | 1.7 | 1.1 | 1.3 | 8.6 |
| Nov | 1.4 | 0.6 | -2.0 | 1.7 | 1.2 | 1.3 | 4.4 |
| Oct | 1.5 | 0.8 | -1.7 | 1.8 | 1.2 | 1.3 | 6.3 |
| Sep | 1.6 | 0.5 | -1.3 | 2.1 | 1.5 | 1.2 | 4.1 |
| Aug | 1.7 | 0.6 | -0.9 | 2.2 | 1.6 | 0.7 | 4.0 |
| Dec 2009 | 2.3 | 4.1 | -0.7 | 1.4 | 1.6 | -1.6 | 20.5 |
| Dec 2008 | 0.6 | -3.8 | -2.4 | 2.8 | 1.8 | 6.8 | -23.7 |
| Dec 2007 | 3.5 | 3.6 | -1.9 | 3.5 | 2.5 | 5.0 | 18.6 |
| Dec 2006 | 2,3 | 0.5 | -2.0 | 3.2 | 2.7 | 1.3 | 3.7 |
| Dec 2005 | 3.0 | 1.7 | -1.4 | 3.7 | 2.3 | 1.7 | 16.3 |
| Dec 2004 | 3.0 | 2.6 | -0.7 | 3.2 | 2.2 | 2.3 | 18.0 |
| Dec 2003 | 2.0 | -0.1 | -3.9 | 3.2 | 1.5 | 3.6 | 9.4 |
| Dec 2002 | 2.2 | 0.6 | -2.8 | 3.0 | 1.8 | 1.0 | 12.7 |
| Dec 2001 | 1.0 | -2.0 | -2.4 | 2.8 | 1.7 | 2.4 | -13.8 |
| Dec 2000 | 2.4 | 1.5 | -1.3 | 2.9 | 1.8 | 2.8 | 14.1 |
| Average | 2.2 | 1.0 | -20.0* | 2.8 | 1.9 | 2.6 | 6.1 |
*Percentage change from 2000 to 2011.
Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
The headline PCE index is shown in Chart IV-5 from 1999 to 2012. There is an evident upward trend with the carry-trade bump of the global recession after IVQ2008.
Chart IV-5, US, Price Index of Personal Consumption Expenditures 1999-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The headline consumer price index is shown in Chart IV-6. There is also an upward trend but with fluctuations and the 2008 carry-trade bump.
Chart IV-6, US, Consumer Price Index, NSA, 1999-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
The PCE price index excluding food and energy is shown in Chart IV-7. There is less pronounced long-term trend with fewer bumps because of excluding more volatile commodity items.
Chart IV-7, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2012
http://www.bea.gov/iTable/index_nipa.cfm
The core consumer price index, excluding food and energy, is shown in Chart IV-8. There is also an upward trend but with fluctuations.
Chart IV-8, US, Consumer Price Index Excluding Food and Energy, NSA, 1999-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
The PCE price index of food is shown in Chart IV-9. There is a more pronounced upward trend and sharper fluctuations.
Chart IV-9, US, Price Index of Personal Consumption Expenditures Food 1999-2012
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
There is similar behavior in the consumer price index of food in Chart IV-10. There is an upward trend from 1999 to 2011 with a major bump in 2009 when commodity futures positions were unwound. Zero interest rates with bouts of risk aversion dominate the trend into 2011. Risk aversion softens the trend toward the end of 2011 and in 2012.
Chart IV-10, US, Consumer Price Index, Food, NSA, 1999-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
The most pronounced trend of PCE price indexes is that of energy in Chart IV-11. It is impossible to explain the hump in 2008 in the middle of the global recession without the carry trade from zero interest rates to leveraged positions in commodity futures. Risk aversion after Sep 2008 caused flight to the safe haven of government obligations. The return of risk appetite with zero interest rates caused a first wave of carry trades with another upward trend interrupted by the first European sovereign risk crisis in Apr-Jul 2010. Zero interest rates with risk appetite caused another sharp upward trend of commodity prices interrupted by risk aversion from the second sovereign crisis. In the absence of risk aversion, carry trades from zero interest rates to positions in risk financial assets will continue to cause distortions such as commodity price trends and fluctuations.
Chart IV-11, US, Price Index of Personal Consumption Expenditures Energy Goods and Services 1999-2012
Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm
Chart IV-12 provides the consumer price index of energy commodities. Unconventional monetary policy of zero or near zero interest rates causes upward trends in commodity prices reflected in (1) increase from 2003 to 2007; (2) sharp increase during the global contraction in 2008; (3) collapse from 2008 into 2009 as positions in commodity futures were unwound in a flight to government obligations; (4) new upward trend after 2010; and (5) episodes of decline during risk aversion shocks such as the more recent segment during the worsening European debt crisis in Nov and Dec of 2011 and with new strength of commodity prices in the beginning of 2012 followed by softness in another episode of risk aversion and increases during risk appetite.
Chart IV-12, US, Consumer Price Index, Energy, NSA, 1999-2012
Source: US Bureau of Labor Statistics
http://www.bls.gov/cpi/data.htm
Chart IV-13 of the US Energy Information Administration provides prices of the crude oil futures contract. Unconventional monetary policy of very low interest rates and quantitative easing with suspension of the 30-year bond to lower mortgage rates caused a sharp upward trend of oil prices. There is no explanation for the jump of oil prices to $149/barrel in 2008 during a sharp global recession other than carry trades from zero interest rates to commodity futures. Prices collapsed in the flight to government obligations. Risk appetite with zero interest rates resulted in another upward trend of commodity prices after 2009 with fluctuations during periods of risk aversion. All price indexes are affected by unconventional monetary policy.
Chart IV-13, US, Crude Oil Futures Contract
Source: US Energy Information Administration
Source: Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D
There are waves of inflation of producer prices in France as everywhere in the world economy (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html), as shown in Table IV-7. There was a first wave of sharply increasing inflation in the first four months of 2011 originating in the surge of commodity prices driven by carry trades from zero interest rates to commodity futures risk positions. Producer price inflation in the first four months of 2011 was at the annual equivalent rate of 11.7 percent. In the second wave, producer prices fell 0.5 percent in May and another 0.1 percent in Jun for annual equivalent inflation in May-Jun 2011 of minus 3.5 percent. In the third wave from Jul to Sep, annual equivalent producer price inflation was 2.8 percent. In the fourth wave Oct-Dec 2011, annual equivalent producer price inflation was 2.4 percent. In the fifth wave Jan-Mar 2012, average annual inflation rose to 8.7 percent during carry trades from zero interest rates to commodity futures. In the sixth wave in Apr-Jun 2012, annual equivalent inflation fell at the rate of 8.1 percent during unwinding of carry trades because of increasing risk aversion. In the seventh wave, carry trades returned under more relaxed risk aversion with producer price inflation in France at 8.1 percent in annual equivalent in Jul-Oct 2012. In the eighth wave, return of risk aversion caused unwinding carry trade and annual equivalent inflation of minus 4.8 percent in Nov-Dec 2012. The bottom part of Table IV-11 shows producer price inflation at 3.5 percent in the 12 months ending in Dec 2005 and again at 5.2 percent in the 12 months ending in Dec 2007. Producer prices fell in 2008 and 2009 during the global contraction and decline of commodity prices but returned at 5.4 percent in the 12 months ending in Dec 2010.
Table IV-7, France, Producer Price Index for the French Market, ∆%
| Month | 12 Months | |
| Dec 2012 | -0.3 | 1.7 |
| Nov | -0.5 | 1.9 |
| AE ∆% Nov-Dec | -4.7 | |
| Oct | 0.4 | 2.8 |
| Sep | 0.3 | 2.8 |
| Aug | 1.3 | 2.8 |
| Jul | 0.6 | 1.5 |
| AE ∆% Jul-Oct | 8.1 | |
| Jun | -0.9 | 1.3 |
| May | -1.1 | 2.2 |
| Apr | -0.1 | 2.8 |
| AE ∆% Apr-Jun | -8.1 | |
| Mar | 0.5 | 3.9 |
| Feb | 0.8 | 4.3 |
| Jan | 0.8 | 4.3 |
| AE ∆% Jan-Mar | 8.7 | |
| Dec 2011 | -0.2 | 4.6 |
| Nov | 0.4 | 5.6 |
| Oct | 0.4 | 5.7 |
| AE ∆% Oct-Dec | 2.4 | |
| Sep | 0.3 | 6.1 |
| Aug | 0.0 | 6.2 |
| Jul | 0.4 | 6.3 |
| AE ∆% Jul-Sep | 2.8 | |
| Jun | -0.1 | 6.1 |
| May | -0.5 | 6.2 |
| AE ∆% May-Jun | -3.5 | |
| Apr | 1.0 | 6.7 |
| Mar | 0.9 | 6.7 |
| Feb | 0.8 | 6.3 |
| Jan | 1.0 | 5.6 |
| AE ∆% Jan-Apr | 11.7 | |
| Dec 2010 | 0.8 | 5.4 |
| Dec 2009 | 0.1 | -2.9 |
| Dec 2008 | -1.5 | -0.2 |
| Dec 2007 | 0.6 | 5.2 |
| Dec 2006 | -0.2 | 2.9 |
| Dec 2005 | 0.2 | 3.5 |
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20130131
Chart IV-7 of the Institut National de la Statistique et des Études Économiques of France provides the behavior of the producer price index of France for the various segments: import prices, foreign markets, domestic market and all markets. All the components exhibit the rise to the peak in 2008 driven by carry trades from zero interest rates of unconventional monetary policy that was of such an impulse as to drive increases in commodity prices during the global recession. Prices collapsed with the flight out of financial risk assets such as commodity positions to government obligations. Commodity price increases returned with zero interest rates and subdued risk aversion. The shock of confidence of the current European sovereign risk moderated exposures to financial risk that influenced the flatter curve of France’s producer prices followed by another mild trend of increase and moderation in Dec 2011 and then renewed inflation in the first quarter of 2012 with a new pause in Apr 2012, decline in May-Jun 2012, the jump in Jul-Oct 2012 and the decline in Nov-Dec 2012.
Chart IV-14, France, Producer Price Index (PPI)
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20130131
France’s producer price index for the domestic market is shown in Table IV-8 for Dec 2012. The segment of prices of coke and refined petroleum decreased 3.2 percent in Dec 2012 and increased 1.7 percent in 12 months. Manufacturing prices, with the highest weight in the index, decreased 0.3 percent in Dec and rose 1.4 percent in 12 months. Mining prices decreased 0.6 percent in Dec and increased 3.1 percent in 12 months. Waves of inflation originating in carry trades from unconventional monetary policy of zero interest rates (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html) tend to deteriorate sales prices of productive activities relative to prices of inputs and commodities with adverse impact on operational margins and thus on production, investment and hiring.
Table IV-8, France, Producer Price Index for the Domestic Market, %
| Dec 2012 | Weight | Month ∆% | 12 Months ∆% |
| Total | 1000 | -0.3 | 1.6 |
| Mining | 130 | -0.6 | 3.1 |
| Mfg | 870 | -0.3 | 1.4 |
| Food Products, Beverages, Tobacco | 188 | 0.3 | 4.5 |
| Coke and Refined Petroleum | 70 | -3.2 | 1.7 |
| Electrical, Electronic | 92 | 0.3 | 1.1 |
| Transport | 79 | 0.1 | 0.9 |
| Other Mfg | 441 | 0.0 | 0.1 |
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20130131
Italy’s producer price inflation in Table IV-9 also has the same waves in 2011 and into 2012 observed for many countries (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html). The annual equivalent producer price inflation in the first wave Jan-Apr 2011 was 10.7 percent, which was driven by increases in commodity prices resulting from the carry trades from zero interest rates to risk financial assets, in particular leveraged positions in commodities. In the second wave, producer price inflation was minus 0.2 percent in May and flat in Jun for annual equivalent inflation rate in May-Jun 2011 of minus 1.2 percent. In the third wave, annual equivalent inflation was 2.4 percent in Jul-Sep 2011 in a pause of risk aversion. With the return of risk aversion in the fourth wave coinciding with the worsening sovereign debt crisis in Europe, annual equivalent inflation was 0.4 percent in Oct-Dec 2011. Inflation accelerated in the fifth wave in Jan and Feb 2012 to annual equivalent 7.4 percent and annual equivalent of 6.6 percent in Jan-Mar. In the sixth wave, annual equivalent inflation in Mar-Apr was at 4.3 percent. In the seventh wave, risk aversion originating in world economic slowdown and financial turbulence softened carry trades with annual equivalent inflation falling to minus 2.4 percent in May-Jun 2012. In the eighth wave, more aggressive carry trades into commodity futures exposures resulted in increase of inflation at annual equivalent 4.1 percent in Jul-Sep 2012 and 6.8 percent in Jul-Aug 2012. In the ninth wave, risk aversion caused unwinding carry trades with annual equivalent inflation of minus 2.1 percent in Sep-Dec 2012.
Table IV-9, Italy, Industrial Prices, Internal Market
| Month ∆% | 12-Month ∆% | |
| Dec 2012 | -0.2 | 2.0 |
| Nov | -0.1 | 2.2 |
| Oct | -0.3 | 2.6 |
| Sep | -0.1 | 2.8 |
| AE ∆% Sep-Dec | -2.1 | |
| Aug | 0.9 | 3.0 |
| Jul | 0.2 | 2.2 |
| AE ∆% Jul-Aug | 6.8 | |
| Jun | -0.1 | 2.2 |
| May | -0.3 | 2.3 |
| AE ∆% May-Jun | -2.4 | |
| Apr | 0.3 | 2.5 |
| Mar | 0.4 | 2.8 |
| AE ∆% Mar-Apr | 4.3 | |
| Feb | 0.4 | 3.2 |
| Jan | 0.8 | 3.5 |
| AE ∆% Jan-Feb | 7.4 | |
| Dec 2011 | 0.0 | 3.9 |
| Nov | 0.3 | 4.7 |
| Oct | -0.2 | 4.7 |
| AE ∆% Oct-Dec | 0.4 | |
| Sep | 0.2 | 4.7 |
| Aug | 0.1 | 4.8 |
| Jul | 0.3 | 4.9 |
| AE ∆% Jul-Sep | 2.4 | |
| Jun | 0.0 | 4.6 |
| May | -0.2 | 4.8 |
| AE ∆% May-Jun | -1.2 | |
| Apr | 0.7 | 5.6 |
| Mar | 0.8 | 6.2 |
| Feb | 0.7 | 5.8 |
| Jan | 1.2 | 5.3 |
| AE ∆% Jan-Apr | 10.7 | |
| Dec 2010 | 0.7 | 4.7 |
| Year | ||
| 2012 | 2.6 | |
| 2011 | 5.0 | |
| 2010 | 3.0 | |
| 2009 | -5.4 | |
| 2008 | 5.9 | |
| 2007 | 3.3 | |
| 2006 | 5.2 | |
| 2005 | 4.0 | |
| 2004 | 2.7 | |
| 2003 | 1.6 | |
| 2002 | 0.2 | |
| 2001 | 1.9 | |
| Average ∆% 2000-2012 | 2.5 |
Source: Istituto Nazionale di Statistica
http://www.istat.it/it/archivio/81088
Chart IV-15 of the Istituto Nazionale di Statistica provides 12-month percentage changes of the producer price index of Italy. Rates of change in 12 months stabilized from Jul to Nov 2011 and then fell to 3.5 percent in Jan 2012 with increases of 0.8 percent in the month of Jan 2012 and 0.4 percent in Feb. Inflation was 0.4 percent in Mar 2012 and 2.8 percent in 12 months. The decline of annual equivalent inflation from 7.4 percent in Jan-Feb 2012 to 4.3 percent in Mar-Apr pulled down 12-month inflation to 2.8 percent in Mar and 2.5 percent in Apr. Percentage declines of inflation of 0.3 percent in May and 0.1 percent in Jun pulled down the 12-month rate of inflation to 2.2 percent in Jun 2012. Renewed inflation of 0.2 percent in Jul 2012 and 0.9 percent in Aug 2012 pulled up the 12-month rate to 3.0 percent in Jul 2012. The decline of producer prices by 0.1 percent in Sep 2012 followed by declines of 0.3 percent in Oct 2012, 0.1 percent in Nov 2012 and 0.2 percent in Dec 2012 pulled down the 12-month rate to 2.0 percent in Dec 2012.
Chart IV-15, Italy, Producer Price Index 12-Month Percentage Changes
Source: Istituto Nazionale di Statistica
Monthly and 12-month inflation of the producer price index of Italy and individual components is provided in Table IV-10. Energy prices decreased 0.7 percent in Dec 2012 and rose 5.4 percent in 12 months. Producer-price inflation is negative for most components in the month of Dec with the exception of decline of no change for consumer goods and nondurable goods. There is higher inflation in 12 months of 2.2 percent for nondurable goods than 0.8 percent for durable goods with the highest 12-month inflation of 5.4 percent for energy.
Table IV-10, Italy, Industrial Prices, Internal Market, ∆%
| Dec 2012/ | Dec 2012/ | |
| Total | -0.2 | 2.0 |
| Consumer Goods | 0.0 | 2.0 |
| Durable Goods | -0.2 | 0.8 |
| Nondurable | 0.0 | 2.2 |
| Capital Goods | -0.1 | 0.5 |
| Intermediate | -0.1 | 1.0 |
| Energy | -0.7 | 5.4 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/81088
© Carlos M. Pelaez, 2010, 2011, 2012, 2013
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